Low float stocks have a low number of shares issued in relation to high float stocks. Low float stocks usually have more volatile price action than larger float stocks. With fewer shares in the market buying and selling has a higher impact on price movement. Low float stocks tend to have larger bid/ask spreads and less liquidity for slower trade fills.
A low float stock can also be considered as one with a relatively small number of shares available to trade on the open market. That doesn’t mean the company don’t have millions of shares in their float as most do. However these shares are already held by institutional investors inside funds, company employees, or other large investors as long term holdings. All these shares are in effect not being traded but held and removed from the market. A company’s available shares is also reduced with stock buy backs that lower the existing share float. A company might have 100 million total shares issued but only 20% available for trading in the market making it a low float stock. This means traders only have access to 20 million active shares available to buy.
Low float stocks can have high volatility due and move sharply in either direction as it doesn’t take a lot of buying or selling pressure to cause a large percentage of price movement. They can at times create opportunities to capture large movements for day traders but with this volatility comes both the potential for risk of loss as well as the chance of profit.
Day traders usually prefer large intraday price moves to create opportunities for profits. Swing traders and trend followers like high returns and stocks that can trend in one direction for days and weeks. Low float stocks can do both of these things during supply and demand imbalances. When new good or bad fundamental news moves a stock with a limited amount of shares to trade, it is not difficult to get it moving in one sustained direction. Low float stocks can have large percentage moves in price in short periods of time. The trader of a low float stock must act quickly to lock in profits while they are there or cut losses quickly because once it gets moving and can keep going.
Lower float stocks can have larger moves through their accumulation and distribution cycles that create triple digit returns. These are the stocks that can create the 10-baggers or more that many stock traders are looking for. These stocks can also drop -50% to -90% from their all-time highs when they go out of favor based on deteriorating fundamentals or after a large speculative run up that ends. Everyone must consider whether low float stocks are right for their own trading or investing strategy.