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Some define low float stocks as those with fewer than 10 million publicly traded shares, but that includes a lot of penny stocks that most retail investors shy away from.
There's also the factor of trading volume. For a low-float stock to be volatile, it also needs enough trading volume to push demand to levels necessary to move the stock price.
Penny stocks, while almost always low-float stocks, usually don't generate enough trading volume for the low float to matter. Related Articles at Money Morning. The solution is truly rather easy: It relies upon the Volume that they do. One that you will be comfortable using, and understand and appreciate.
They're simple to buy but laborious to trade according to 1 monetary guru online. Comment feed for this post. The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis. Risk in Low-Float Stocks May 14th, in contributors. Money Morning Article of the Week by David Zeiler, Associate Editor, Money Morning While often ignored in the financial media, "low-float" stocks should be in every investor's vocabulary.
The strategy worked for LinkedIn Corp. With a tiny float of just 7. The initial float for Caesar's was just 1. You're creating an artificial demand and supply imbalance that leads to speculation.
Defining a Low-Float Stock Unlike more widely known categories like market capitalization, low-float stocks don't have a specific definition. With this in mind, Money Morning decided to create a more investor-friendly definition of low-float stocks. To pick the stock float cutoff point, we took the stocks that fell into this category about 2, and looked for a logical cutoff point about midway through, which turned out to be 70 million shares.
To illustrate the extra risk that low-float stocks represent, we then compared the volatility of the group with floats under 70 million shares against the group with floats over 70 million shares. To measure volatility we used the beta indicator.
A beta of 1 means the stock's volatility mirrors that of the overall market. A beta above 1 means the stock is more volatile than the overall market. For instance, a beta of 1. Then Money Morning filtered the results using four levels of average trading volume. As the chart shows, the low-float stocks were on average 10 percentage points higher than the larger float stocks, with the gap growing wider as trading volume increases.
That's a substantial risk, and one investors need to consider when doing their due diligence on any given stock. It just goes to show that even though low-float stocks are not often discussed, you can't afford to overlook the amount of shares that are available to trade. It's important to remember these stocks can go down as fast as they went up. Investors who ignore this aspect of a stock may be taking a risk that they don't understand.
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