Low Float Stocks: 2 Key Indicators To Check Before Trading Them

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In terms of float, low can be the way to go when it comes to trading penny stocks.

In case you’re scratching your head, let me clarify: I’m not talking about the huge slow-moving floats like you see in the Macy’s Thanksgiving Day Parade. In the stock market, “float” refers to the number of shares of a stock that are available to the public for trading.

Low float stocks tend to offer lots of volatility which means that they can spike in big ways that can potentially net you profits.

However, trading low float stocks can also present a high level of risk, so you have to know what you’re doing. I’ll tackle that in this post.

Here, I’ll offer an introduction to low float stocks — what they are, how you can benefit from trading them, and some of the best indicators and tips for how to get started with them.

What Are Low Float Stocks?

Not to be roundabout, but before you can understand low float stocks, you need to understand a little something called shares outstanding.

The shares outstanding refers to all of the shares of a company’s stock. This includes shares held by all shareholders, including what are called “restricted shares,” which are held by company insiders/officers and big blocks of shares held by institutional investors.

If you’re looking at a company’s balance sheet, you can find the number of shares outstanding listed by the heading “Capital Stock.”

The shares outstanding are an important piece of the puzzle when calculating a company’s market capitalization (check out my post on market cap) and earnings per share or EPS (check out my post about EPS).

So there are the shares outstanding, which include the restricted shares that wouldn’t readily be available to traders like you and me.

Then, there’s what’s called the “float”. What are float shares? The float refers to the number of shares that are freely available for trading.

Even if a company has a massive amount of shares outstanding, if many of them are held by insiders, they aren’t necessarily tradable for people like you and me.

If the number of shares available for other traders is fairly low, the stock is said to have a low float.

There isn’t a specific number that denotes a low float. Traders might have their own standards for what constitutes a low float. For instance, some might consider a stock with 10–20 million shares that are freely available for trading a low float stock.

Benefits of Trading Low Float Stocks

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Here’s the thing about low float stocks: they don’t have a ton of supply. This means that any catalyst that causes demand (or lack thereof) will have a larger effect on the shares that are available. In plain English, this means the stock is more volatile.

Wait, so is this good news or bad news for traders? A little bit of both, because this simultaneously raises the risk, but also the potential rewards. Let’s talk about the risks first.

Risks of Low Float Stocks

The volatility that is inherent to a low float stock means that it can have rapid moves in either direction.

Since there are pretty few available shares, the supply and demand can be impacted quickly and drastically based on news (good or bad).

Because of this, these stocks are ripe for fraudulent campaigns like the “short and distort,” so it’s always important to perform both fundamental AND technical analysis on the stocks and to dig deep to determine the validity of press releases and news.

Adding to the risk factor, low float stocks are more common for micro- or small-cap companies. These companies aren’t as established as large-cap companies and tend to have more volatility and risk inherently. So, the low float simply compounds this risk.

Rewards of Low Float Stocks

The good news is that just about everything that makes low float stocks risky also makes them potentially rewarding as well.

Because these stocks can have big moves, as a trader you can grab potential opportunities if you can predict or get ahead of the trend.

While news is generally a catalyst for movement in a low float stock, if you’re intelligent about keeping watchlists, conducting both fundamental and technical analysis, and identifying hot sectors, you can potentially benefit.

As I explain in my PennyStocking 101 guide, “since there’s not a lot of supply out there and if the company announces good news, ‘low float stocks’ can spike 50%, 100% or even 200% in a day whereas stocks with many publicly available shares can’t spike that much since there are sellers at every level on the way up willing to take profits.”

2 Key Indicators to Check Before Trading Low Float Stocks

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Now that you’ve evaluated the pros and cons of trading low float stocks, maybe you’re intrigued.

That leads to the next question: how to find low float stocks?

Consider looking at these two key indicators to narrow down your choices …

High Volume

When it comes to the stock market, volume equals movement.

Volume is the number of shares of a stock traded during a finite period of time. This is based on every transaction — because for every buyer, there is a seller. So every buy and every sell aren’t added to the volume separately, but rather as a single transaction unit.

Volume is an overall important indicator to use as part of your technical analysis because it can help you determine the strength of the price movement of a given stock within a given time period.

When a price moves, the bigger the volume, the bigger and more meaningful the overall move. This is particularly true for low float stocks. So when looking at low float stocks, be sure that they have sufficient volume before getting into a trade. 

News Catalyst

The very fact that a stock is low float indicates that there is a relatively small supply of stock shares available for trading. This means that the supply and demand can shift on a dime.

So when a juicy news catalyst hits, it can strongly impact the price of a stock in question, causing it to rapidly rise (or fall, depending on the news) in price.

As a trader, it’s possible to profit both as the price goes up or as the price goes down — it’s just a matter of figuring out which way the stock is moving.

How can you use the news to your advantage? First, be sure to research the catalyst to see if the news “has legs.” Cut through the bullshit of self-serving PR statements and try to find the real scoop yourself.

Be sure to back it up with research from the earnings reports and by checking out the stock’s charts to see if you can find any strong patterns.

If you’ve identified a strong news catalyst and can back it up with research, it’s a key indicator that a low float stock could be moving in ways that could offer trading opportunities.

Of course, I should add a caveat about rumors. Rumors can move a stock price, but you shouldn’t necessarily trust them!

How to Trade Low Float Stocks in 5 Steps

Now that you have some basic knowledge about low float stocks, how can you put it to work?

Here are five key steps that you’ll need to follow to trade low float stocks.

Once you read through these, get even more of a scoop with real-life examples: You can see more about my approach for trading low float stocks and what I look for in potential trades in this video.

#1 Common Stock Patterns and Technical Analysis

When seeking low float penny stocks, do as you would with researching any penny stock: Look for common stock patterns and make use of your technical analysis.

Let’s start with technical analysis. As a trader, I rely a lot more on technical analysis than fundamental analysis.

Technical analysis is where you play mathematician or scientist with your research. Your key focus is on the stock’s action based on past performance.

I trade by patterns, numbers, and proven trends — not based on gut instincts or rumors. It keeps things very simple and helps me focus on not getting emotional about trades.

When it comes to performing technical analysis, there are different tools of the trade that different traders rely on.

Personally, I use a combination of the simple moving average, moving average convergence/divergence, relative strength index, parabolic SAR, and my own past experience.

When I say my own past experience, I guess I’m relying a little bit on hunches, but these are based on what I’ve seen over the years and not based on believing in the hype!

Curious about the tools I mentioned above? You can read more about my favorite technical analysis tools here.

#2 Fundamental Analysis

When it comes to trading stocks — low float or otherwise — I put the majority of my faith in technical analysis.

However, this doesn’t mean I totally skip fundamental analysis. In its own way, it’s just as important, and it can act as either proof positive of your technical data, or it can introduce new food for thought.

Fundamental analysis is where you take a look at the business that is offering the stock and how its performance might affect the stock price.

Your bible in fundamental research is the company’s earnings reports. You can read through the company’s earnings report to gain valuable insight as to how they’re handling their finances, their debts, and read commentary from high-ranking company executives.

To understand fundamental analysis, you’ll need to know a few basics about business finance. Things like operating income and financial statements come into play here, so you may need to familiarize yourself with some of these concepts.

This post on earnings reports may be helpful in allowing you to see what kind of information can be helpful in your fundamental analysis.

You might not make a final decision about whether to execute a trade based on what you find in the earnings report, but the more educated you are before executing, the better!

#3 Create a Low Float Stock List

There are thousands of low float stocks out there. So how do you determine the top contenders to trade? This is where the importance of developing a watchlist comes into play.

Everyone’s method for making a watchlist is a little bit different. If you need a starting point, you might consider using the method of one of my most successful students, Tim Grittani.**

As you’ll learn in this video, he may start with a list of stocks that are up 10 percent for the day, trading around 300 million in volume. This list might consist of 5 stocks, or it might be as many as 20; it depends on the day and the market.

From there, he’ll go through every stock on the list and look at the daily charts to see if any patterns emerge or if anything seems to show promise.

Doing this can help determine if your approach will be to go long or to short.

Often, this will further narrow things down, because you don’t want a massive watchlist or you’ll be so busy chasing stocks that you might not be focused on the strongest prospects.

The few that seem most promising can be added to your watchlist. By performing this series of quick research, you can really narrow down your choices so that you can focus on the best contenders.

If you want to continue with Tim’s technique, go ahead and add it to a spreadsheet and design a trading plan for the few that seem most promising. This preparation will help determine that if any of the stocks meet your criteria, you’ll be able to react ahead of the curve.

Having trouble narrowing down what should go on your watchlist? Ask yourself these questions to choose the best trades for you:

  • Which patterns have you had the most success with?
  • Where’s the most volatility (and most potential for profit)?
  • Which way is the stock gapping pre-market?

#4 Look For Low Float Stocks With High Volume

When looking at any potential stock, you should look at its volume. But this is extremely important when it comes to low float stocks.

With the lower supply in low float stocks, volume can be a powerful indicator that the price is going to see some action. The volume is more meaningful because of the lower supply that comes with low float stocks.

Bar charts can help you figure out the volume fast — they also give you the ability to quickly scope out any trends in the volume of a stock.

If the bars in the chart are higher than usual, this means that the stock is experiencing high volume.

This might be as the result of news, or it might just be a sign that it’s priced to move right now. You can use the volume to determine — and confirm — price movement.

Further, if the volume is raised when the price goes up or down, it’s a price move that is considered strong.

Volume is also important if you want to sell short. Low floats can be tricky because often, you can’t find access to shares to borrow. So you want to make sure that there’s enough volume, otherwise entry and exit could be hard.

To review: Demand from momentum traders — and limited supply for the short sellers — means that share prices can go nuts for short periods of time.

For example, if a stock has a low float, say 200k shares, it can move very rapidly up and down as compared to a stock with a float of, say, 50 million.

It’s going to take a lot more to rock the boat with more shares, whereas less action could have a bigger impact on the lower float stock.

Don’t get caught on the wrong side of it!

#5 Keep on Learning

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© 2018 Millionaire Media, LLC

Repeat after me: I will never, ever, ever stop learning.

I can’t stress this enough. Learning how to trade is not a one-and-done sort of thing. It’s not like memorizing facts for a pop quiz.

The market is not static. It is ever moving, ever evolving. If you want to have a long-term career as a trader, you too need to continue to change and adapt along with it. That means you have to keep your eyes open and keep on absorbing knowledge.

Learning about low float stocks and methods for how to trade them is one thing. But you need to put it to work, test your theories with paper trading, and continue refining your methods for the best results over time.

It’s possible that you’ll come up with a setup that works over and over successfully trading low float stocks. But then, one day, all of a sudden it won’t work anymore. It’s just the way the market works.

It’s an ongoing process, so accept it and embrace it. Continue working on your trading. Keep a trading journal to monitor your practice. If this is the life for you, ongoing education will have to be part of it!

No matter what type of trading you want to get into, no matter what mentor you go with, keep this in mind: If you want to be an effective trader, you must study like crazy, do the work, and keep on doing it over time.

Trading Challenge

If you want to fast forward your education and avoid plenty of common trading mistakes, consider joining my Trading Challenge.

Don’t worry, you’re signing up for more than just access to my teachings. Not only will you learn from me, but also from my top students — and you’ll also have a built-in community of trading peers.

The community aspect is so important because it not only inspires, but it also holds you accountable. As you’ll learn as a trader, it can be hard to maintain motivation day in and day out. The group can be a great support system and help keep you going.

You’ll also get access to resources like webinars and my personal watchlists. You get access to every one of my trades, so you can watch and learn from what I do and adapt my techniques to suit your style as a trader.

Could you do it alone? Yes, it has been done. But why risk money and time getting up to speed when you don’t have to?

I teach so that I can give my students the advantages and knowledge I never had when I was starting out. It’s a way that I pay it forward and help others realize their potential as traders.

My Favorite Low Float Stock Screener

Where oh where should you go to screen for low float stocks? Here are some of my go-to resources:

StocksToTrade

StocksToTrade is one of the first platforms that offers great stock screening AND a platform to trade from.

Scanning and screening stocks for your watchlist is a snap with the constantly evolving and innovative research platform. This is the platform I used to find one of my biggest trades ever.

How To Find Low Float on Thinkorswim

Thinkorswim is another popular platform for traders, but it doesn’t come with a low float stock scan built in.

This means that as a trader, you may have to invest in an add-on from a developer, or you can perform your own research by looking up the company’s earnings report.

But once you’ve identified the low float stocks, this platform has plenty of tools for sorting them and determining which ones are worthy of your watchlist.

The Bottom Line

Low float stocks can provide many opportunities for traders. However, because they have a high level of inherent risk, it’s important to do plenty of research on potential plays before executing trades.

By making the most of screening tools, charts, and performing fundamental and technical analysis, you can make more educated trades, and — hopefully — reap good results.

Have you traded low float stocks? Leave a comment below.

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