Low float stocks can make for amazing penny stock trade setups — if you know what to look for.
(If you’re new to penny stocks, check out my FREE guide to penny stocks here.)
What’s so great about low float stocks? Volatility. They can spike big. It’s up to you to learn to ride the momentum … intelligently.
Trading low float stocks can present a high level of risk. You must know what you’re doing. I’ll tackle that in this post.
What are low float stocks? How you can potentially benefit from trading them, and how do get started trading low float stocks? Read on for the answers. Plus, I’ll discuss some low float stock screeners.
Let’s get started.
Table of Contents
- 1 What Are Low Float Stocks?
- 2 Why Should You Trade Low Float Stocks?
- 3 2 Key Indicators to Check Before Trading Low Float Stocks
- 4 How to Trade Low Float Stocks in 5 Steps
- 5 5 Low Float Stocks to Watch in 2020
- 6 My Favorite Low Float Stock Screener
- 7 Frequently Asked Questions About Low Float Stocks
- 8 The Bottom Line
What Are Low Float Stocks?
Before you can understand stock float, you need to understand shares outstanding.
The term ‘shares outstanding’ refers to all of a company’s shares. That includes restricted shares, which are held by company insiders, execs, and institutional investors. This stock can’t be freely traded.
If you’re looking at a company’s balance sheet, you can find the number of shares outstanding listed by the heading “Capital Stock.” Shares outstanding are a key piece when calculating a company’s market cap and earnings per share (EPS).
Then there’s the float.
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 a lot of them are restricted, everyday traders can’t trade them.
If the number of shares available to trade is fairly low, the stock has a low float.
There isn’t a specific number that denotes a low float. But a lot of traders consider a stock with 10 million shares or less freely available for trading a low float stock.
Confused? Don’t be. Check out this video where I break it down more:
Why Should You Trade Low Float Stocks?
These stocks can move FAST with high volume. They can be great for long-biased traders, as they can have huge gains. Especially if there’s a catalyst and a short squeeze.
Low float stocks can be great for traders with small accounts … if they move in the direction you’re trading. For example, don’t short a low float on its first green day running on news.
Benefits of Trading Low Float Stocks
Here’s the thing: these stocks have limited supply. So any catalyst that leads to demand (or lack thereof) can have a larger effect on available shares. The stock can be more volatile.
So is good or bad for traders? Kinda both, actually. It simultaneously raises the risk and potential rewards. Let’s talk about the risks…
Risks of Low Float Stocks
The volatility with low float stocks means they can make rapid moves up or down.
Since there are limited available shares, news (good or bad) can drastically affect supply and demand.
Low floats are more common for micro- or small-cap companies. These companies aren’t as established as large-caps and tend to have more volatility and risk. The low float compounds the risk.
Potential Rewards of Low Float Stocks
The good news? Just about everything that makes these stocks risky can make them potentially rewarding.
Like I said, these stocks can make big moves. As a trader, you have to prepare to grab opportunities. You gotta be ready.
2 Key Indicators to Check Before Trading Low Float Stocks
1.) High Volume
In the stock market, volume equals movement.
Volume is the number of shares of a stock traded during a period of time. It’s based on every transaction — for every buyer, there’s a seller. So every buy and every sell aren’t added to the volume separately but as a single transaction unit.
Volume is an important indicator in technical analysis. It can help you determine a price movement’s strength for a given stock within a time period.
The bigger the volume, the bigger the potential for the overall move — particularly for low float stocks.
2.) News Catalyst
The fact that a stock is low float indicates that there’s 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 really move the stock in question, causing it to rapidly rise (or fall) in price.
Traders can potentially profit on the way up or down. It’s a matter of knowing which way the stock is moving and having a solid trading plan.
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 BS of self-serving PR statements and find the real scoop yourself.
I use StocksToTrade’s Breaking News Chat. Two former wall street pros sift through news and alert members to items that have the most potential to move the stocks I like to trade. Not all news moves stocks — remember to react, not predict.
Also, back it up with research from earnings and the stock’s charts. Look for strong patterns.
A strong catalyst backed up with research can indicate a low float stock trading opportunity. I should add a caveat about rumors. Rumors can move stock prices, but you shouldn’t necessarily trust them! It’s all about preparation.
How to Trade Low Float Stocks in 5 Steps
Here are five key steps to help you trade low float stocks.
Want real-life examples? See my approach for trading these stocks and what I look for in potential trades in this video.
Let’s break it down.
#1 Common Stock Patterns and Technical Analysis
When seeking low float penny stocks, do as you would when researching any penny stock: Look for common patterns and run technical analysis.
As a trader, I rely more on technical analysis than fundamental analysis.
I trade by patterns, numbers, and proven trends — not on gut instincts or rumors. It keeps things simple and helps me focus.
When it comes to technical analysis, different traders use different tools. You have to find what works for you. Past experience is key. That’s why I tell my students to study the past. History repeats, and I’m really just a glorified history teacher.
Want specific tools? Read more about technical analysis tools here.
#2 Fundamental Analysis
I may focus more on technicals…
But I don’t totally skip fundamental analysis. It can be just as important. It’s where you look at the company behind the stock and its financials.
Earnings reports can give you valuable insight into how a company handles its finances and debt. You can also read commentary from high-ranking company execs.
To understand fundamental analysis, you need to know a few basics about business finance. Things like operating income and financial statements. Get familiar with these concepts. You can start with this post.
#3 Create a Low Float Stock List
There are thousands of stocks out there. So how do you determine the top contenders to trade? Your watchlist.
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% for the day, trading around 300 million in volume. This list might include five stocks or 20. It depends on the day and the market.
From there, he goes through every stock on the list and looks at the daily charts for patterns. He’s looking for the strongest contenders.
It’s a good habit to follow. It’s how you can narrow down your choices to the best stocks for your strategy.
Having trouble with your watchlist? Answer the following:
- Which patterns have you had the most success with? (Don’t know? You need this.)
- Where’s the most volatility (and potential)?
- Which way is the stock gapping premarket?
#4 Look For Low Float Stocks With High Volume
Always look at volume. Especially with low float stocks.
With the lower supply in low float stocks, volume can be a powerful indicator for price action.
If you don’t have enough volume, you can get stuck in a trade. Don’t be that trader.
#5 Keep on Learning
Repeat after me: I will never stop learning.
As long as you trade, you must be committed to learning.
The market’s not static. If you want a long-term trading career, you too need to continue to change and adapt. You need to put in the work, test your theories with paper trading, and refine your methods over time.
You may find a setup that works over and over. But then one day, it stops working. That’s how the market works.
The market in 2020 has been crazy. There have been tons of plays, long and short. I created my no-cost “Volatility Survival Guide” to help you learn to navigate this crazy market.
Want to kickstart your education and avoid common trading mistakes? Consider applying for my Trading Challenge.
You’ll also get access to resources like webinars, DVDs, and my personal watchlists. (Sign up for my weekly watchlist here.) You can learn from my techniques and adapt them to suit your trading style.
I teach so I can give my students the knowledge I never had when I started out. It’s how I pay it forward and help others realize their trading potential.
5 Low Float Stocks to Watch in 2020
These stocks have a low float and had a run-up in 2020. Check these out so you can see the potential and prepare.
EKSO Bionics Holdings, Inc. (NASDAQ: EKSO)
On June 25, Ekso Bionics Holdings, Inc. (NASDAQ: EKSO) announced news about its FDA clearance to market its robotic exoskeleton device to patients with an acquired brain injury (ABI).
The stock’s float is just under 5 million shares. In premarket, the stock was in the $3s but by after-hours, the stock was trading in the $10s. The volume was huge — 123 million.
See how fast these low floats move on news catalysts. Especially when the volume comes in…
Immuron Limited (NASDAQ: IMRN)
On June 9, Immuron Limited spiked on news that its research partner requested a meeting with the FDA to discuss a new drug to treat infections.
This stock’s float is under 2 million shares. Check out the explosive move on the chart. When it broke the days’ high in the afternoon, it squeezed out the shorts.
Carver Bancorp, In. (NASDAQ: CARV)
When Black Lives Matter protests were peaking in mid-June, a few stocks started running because of the companies’ business with Black Americans.
On June 17, CARV was one of these stocks. It traded a daily volume of 59 million shares and has a float of only 1.35 million.
Urban One, Inc. (NASDAQ: UONE)
Another stock running at that time was Urban One, Inc. This has a larger float of 21.48 million shares. On June 16, it traded a daily volume of 45 million shares.
The stock traded from the $4s to the $40s in one day. In the following days, the increased volume allowed for more trading opportunities.
ARCA Biopharma, Inc. (ABIO)
ARCA Biopharma has a float of only 1.18 million shares. On May 28, the company announced it was developing a potential coronavirus treatment.
It traded a massive volume of 83 million shares that day and went from the $7s to the $20s. The next day, it failed. But this shows how news can bring in volume and create massive spikes on low float stocks.
My Favorite Low Float Stock Screener
Here are some of my go-to resources…
I helped design the StocksToTrade platform for screening AND trading. It’s designed for the low float and low-priced stocks I like to trade. You can use StocksToTrade to scan for low floats, and the float displays in charts, watchlists, and more.
I use this tool every day. Learn more about StocksToTrade here.
How to Find Low Float Stocks on Thinkorswim
TD Ameritrade’s thinkorswim is another common trading platform, but it doesn’t come with a built-in scan for stock float.
So you’d have to invest in an add-on or do your own research. But once you find low float stocks, this platform has plenty of tools for further analysis.
How to Find Low Float Stocks on Finviz
Finviz is a free website for stock info and news. It has a free built-in screener, including for float size. This can be a good tool for beginners.
Frequently Asked Questions About Low Float Stocks
Let’s get into some of the most frequently asked questions about low floats.
What Are Low Float Stocks?
Float is the number of stock shares that are freely available to trade. This excludes restricted shares held by insiders and investors. If this number is relatively low —under 10 million or so — a stock is said to have a low float.
How Do You Know If a Stock Is a Low Float?
There isn’t a specific benchmark for what is low float and what isn’t. Different traders have different standards. For instance, many traders consider anything under 10 million to be low float.
How Do You Find the Float of a Stock?
If you want to get technical, you can look at a company’s balance sheet and subtract restricted shares from shares outstanding. However, stock screeners like StocksToTrade make it easier to scan for float and more with built-in tools.
How to Trade Low Float Stocks?
To trade low float stocks, you should consider a number of variables like volume, news catalysts, and whether the stock fits your trading strategy.
What Is a Good Float Percentage?
Different traders have different standards for float percentage. How can you determine what a “good” float means for you? Keep a trading journal and track the float along with the rest of your trade data. That can help you get an idea of what works for your strategy over time.
How Does Float Affect Stock Price?
Because there’s a limited supply of shares, increased demand for the stock can bring greater potential for big price movements. The stock price can be more volatile on the upside and downside.
The number of shares in the float can increase as restricted shares become unrestricted and shareholders sell them into the float. A company can also increase the float through stock offerings and warrants, but these shady practices may drop the stock price.
The Bottom Line
Low float stocks can provide many opportunities for traders. But remember, they come with a higher level of inherent risk. It’s important to do plenty of research on potential plays before executing trades.
Make the most of screening tools, charts, and fundamental and technical analysis. Focus on the process and executing educated trades.
How does the float play into your trades? Leave a comment below and let me know!