Float

Well, hope floats. And other things sink to the bottom and, well, just don't move. Think: Congresspeople.

Float in a financial sense is kinda the same thing. Sorta.

Whatever.com goes public and sells 30% of itself to the public. It had 50 million shares before the IPO and then sold 15 million shares, so that now there are 65 million outstanding.

At this moment, the shares trading is just 15 million. That’s the float. That 15 million number. Then, gradually, after 6 months or so, insiders begin selling...so that they can buy Porsches and diamond-studded tennis rackets, and pay divorce settlements. So 12 million from that 50 million pool go from being sunk or not moving or not…floating...to being in the normal trading pool, which will have grown from 15 million to now 27 million.

That 27 million is now the float.

So...why does float matter? Well, it’s a direct reflection of the liquidity of the company. Let’s say that, on average, a given company trades 2% of its shares…floating.

So here, 2% of 27 million is just 540,000 shares a day. That’s actually a really small amount. That is, if the stock is, say, at 20 bucks a share, that’s only a little over 10 million dollars a day in total volume...and for larger mutual funds, which are tens of billions in size, a tiny float makes it really hard to get in (and out) of the stock...so they generally just avoid stocks with tiny floats. The cost to the company is that its stock trades at lower multiples.

It's also a problem in that the shareholders of very large mutual funds have the ear of the very large companies who often are…acquisitive. So that the tiny companies with small floats aren’t whispered about by the fund managers to the companies who might be thinking about buying whatever.com...or whatever.

So yeah, that’s float. And if you’re a big pond…you, uh, want to avoid the small fish.