Previously, trading used to be exclusive to entrepreneurs and businessmen who used to assign a broker on trading floors executing buy and sell orders over the telephone. Thus, new entrants used to face challenges competing with market players.
These days, the barriers to entry are lower than ever, thanks to advanced technologies. Now, almost anyone can engage in trading because all that is needed now is an internet connection and an account at a brokerage platform.
However, the competition became fiercer, with more companies joining the race and more services introduced, and a trader must utilise all the tools to accurately analyse the market before executing traders. Today, we will discuss an important yet overlooked indicator: stock float rotation.
Understanding Floating Stocks
Let’s start by defying the types of stocks. Publicly traded corporations have outstanding stocks, which are the numbers of company shares available for secondary markets and the public. However, not all the outstanding stocks are tradable, as some are virtually unavailable and are held by the issuing company.
Floating stocks are the type of outstanding stocks that traders can buy and sell in public marketplaces, which are different from the total supply of stocks that a company issues.
Floating Stocks Vs Outstanding Stocks
Floating stocks directly affect the stock price as they are bought and sold in the market, and their demand and supply levels fluctuate. When traders increase their purchases of stock X, the price increases as the demand increases, and vice versa.
Also, corporation events and news such as mergers and acquisitions, whistleblowing news and sales reports affect the stock price as they drive the market sentiment.
On the other hand, outstanding stocks do not affect the stock price as they are unavailable to the public, and the issuing company predetermines the supply level.
Floating stocks are owned by traders and investors who buy the shares and change their ownership. However, restricted stocks are held by the issuing company’s financial institution and top management, besides regulations that entail having some unavailable stocks on the side.
The Impact of Floating Stocks On The Price
Floating stocks are available in secondary markets and can be traded publicly, and the number of these outstanding shares affects the market liquidity of those stocks.
For example, if the market demands a 70% float rate of the total outstanding shares is 60%, a supply shortage is evidence. Moreover, the insufficient number of tradable shares decreases the stock market liquidity, making it hard to buy and sell these shares in the market.
Illiquidity happens because there are not enough shares available in the market to buy, and market activities can sharply change the stock price, increasing it higher and higher. On the other hand, increasing the floating stock supply contributes to improving liquidity levels and making trading more efficient.
Float Rotation – How To Calculate it?
Float rotation refers to the cycles that floating shares go through within a particular time period, such as one day or one trading session. Float rotation means how many times traders buy and sell the whole number of outstanding shares, which provides crucial market insights.
For example, if a company ABC issues 5,000 outstanding shares with only 1,000 floating shares. During a given trading session, if these 1,000 shares were traded 3,000 times (involved in 3,000 trades), it means that the floating shares were traded three times within that trading period, and the float rotation is 3.
Calculating the float rotation is crucial to drive trading strategies and understanding price action and market sentiment. Tracking the float rate is important because if the rotation number decreases, it means that market activity is declining for that stock.
On the other hand, when the float rotation breaks through a major threshold, like going from negative to positive or from one to more than one, it indicates an overall tendency to buy these shares.
Conclusion
Float rotation is a crucial factor that indicates market activities and traders’ willingness to buy these shares. The floating rate refers to the number of times the total available shares have been traded in the market, indicating the demand levels for that company’s stock.
Floating stocks are the number of outstanding shares available for market participants in secondary markets, which can directly affect the stock price. Therefore, understanding their movements is crucial to build an effective stock trading strategy.