One of the most important concepts for you to learn as you start your trading career is what makes stock prices rise and fall …
… What drives volatility?
… What makes a stock jump 336% in a single day?
… What makes a ridiculous selloff occur first thing in the morning?
The simple answer: supply vs. demand.
Download the key points of this post as PDF.
Back in college, I wanted to be an economics major. Then I took a class and it was sooo boring. I hated it! I switched majors to philosophy. Know what? I’m glad I switched but I’m also grateful I took the economics class because I learned basics about how markets work.
Supply vs. demand is the age-old law of trade. But how does this apply to trading the stock market?
One of the most important things I look for as a trader is stock float. When I’m creating my stock watchlist, I know I can trade around certain patterns that low float stocks undergo.
What’s stock float? That’s what you’re learning today, so put on your learning cap and let’s get started.
Table of Contents
- 1 What is a Stock Float?
- 2 Types of Stock Float
- 3 How to Trade Low Float Stocks in 8 Steps
- 3.1 #1 Pay Attention to Stock Market Indicators
- 3.2 #2 Get to Know Key Stock Patterns
- 3.3 #3 Develop a Low Float Stock Strategy
- 3.4 #4 Use Technical Analysis
- 3.5 #5 Use Fundamental Analysis
- 3.6 #6 Develop a Stock Watchlist
- 3.7 #7 Use a Stock Float Screener to Find Breakouts
- 3.8 #8 Never Stop Learning
- 4 The Bottom Line
What is a Stock Float?
Stock float is the number of freely traded shares of a particular stock. But it’s not quite that simple …
When a company goes public, the board authorizes the creation of a certain number of shares. Based on the corporate charter, this is the maximum number of shares a company can legally offer. An increase in the number of shares must be voted on by the shareholders.
Typically, a company issues less than the authorized amount. This is so they can raise more funds down the road without having to get approval from the shareholders.
For example, say Company X decides to raise capital through an IPO (initial public offering). The board of directors authorizes the creation of one million shares. Those shares are called authorized shares.
The company offers 500,000 shares to trade on the open market. These shares are referred to as float shares. They’re the shares you and I can trade when we fire up the trusty computer and login to StocksToTrade.
The company also issues 200,000 shares for company insiders or key employees as part of a stock option plan. These restricted shares can’t be transferred until certain conditions are met. This can include holding the shares for a specific period or meeting corporate milestones.
In this example, the total outstanding shares add up to 700,000. The company holds another 300,000 shares they can issue in the future. The stock float is 500,000 shares.
Keep in mind that sometimes a large percentage of stock is owned by institutional investors like mutual funds. Usually, institutional investors buy and hold for long periods. While they don’t reduce the float, effectively, they reduce the number of shares trading on the open market.
The kinds of stocks I trade, penny stocks, are rarely held by mutual funds or institutional investors. This means the number of outstanding shares is a lot closer to the number of float shares. I’ll show you how to find that information later in this post.
Benefits of Understanding Stock Float for Traders
Back to supply vs demand …
When the float is low (I’ll define low float in the next section) there are fewer shares available to trade on the open market. This can have a huge impact on the price movement of a stock.
It’s the basic economics principle I learned back in college: If demand is high and supply is low, prices go up. If demand is low and supply is high, prices go down.
Types of Stock Float
In general, I think of high float and low float stocks. Whether a stock is high or low float depends on the number of shares available to trade.
There’s not a set number of shares that make a stock high float. But the consensus agreement seems to be somewhere in the 15 to 20 million range. Anything lower than 15 million shares in the float and most traders consider a stock to be low float.
High float stocks tend to be less volatile because there are so many shares available. It takes a lot more buying power to move the stock price higher. While price movement might follow a market or sector trend, they don’t often have big swings because supply meets demand.
Which is why I focus most of my energy on low float stocks …
What is considered a low float stock? You might have looked at the numbers above and thought to yourself, “Wow, that’s a difference of 5 million shares between low and high float. How does that work?”
Good question. Like so much in the stock market, this isn’t an exact science.
According to Tim Bohen, lead trainer at StocksToTrade, anything lower than 10 million is considered low float. So which is it? 10 million shares? 15 million? Or some other arbitrary number?
Since I’m focused on penny stocks, let’s go with Bohen’s number and say 10 million floating shares is the ideal for a low float stock.
How to Trade Low Float Stocks in 8 Steps
Now that you have an understanding of stock float, how do you use the information to increase your possibility of trading success?
First, you should understand how to find the float of a stock.
If you have access to a trading platform like StocksToTrade, you can screen for stock float and then filter for other key indicators. Don’t have a StocksToTrade subscription yet? You can get a sorted database of low float stocks (under 10 million floating shares) at lowfloat.com.
Caution: If you’re using something like lowfloat.com to identify low float stocks, I definitely recommend you do further research. The site will steer you in the right direction but you also need to check their findings against other data.
#1 Pay Attention to Stock Market Indicators
One of the key indicators I look for is high trading volume. Trading volume is the number of shares traded during a session. When more shares are bought and sold, the trading volume is higher. A high volume stock is one that is being traded in large amounts.
This is important because high volume means you can enter and exit your positions a lot easier. The last thing you want is to get stuck in a position because nobody is buying or selling. It bites. you can lose big when you’re stuck in positions like that.
Trading volume is one of the most common indicators shown on stock charts. It’s usually on the bottom of the chart without needing to change any settings on your charting software. I’d be wary of trading low volume stocks.
But be aware that volume can spike on news …
Which brings me to the other key indicator I look for: A powerful news catalyst. News can not only create a spike in trading volume, but it can also lead to powerful price moves. So keep an eye on the news.
You should know why a stock is making big moves. With low float stocks, any pressure on supply and demand can translate into big price movements. If you can’t find a reason, beware.
It could be some kind of marketing campaign without any legs or a pump and dump or some other PR campaign created to jack the price of the stock.
That’s not to say I don’t trade stocks pumped by a PR campaign, but I’m extremely cautious. I want to know exactly why it’s being promoted and when the promotion started.
I want to know if the email I received is sent to the primary list or if it’s sent to list number 10 on day four of the promotion, because promoters pull this kind of BS all the time.
#2 Get to Know Key Stock Patterns
Patterns are called patterns for a reason. They repeat. The beautiful thing is, the human mind is awesome at recognizing patterns. In the stock market, certain patterns happen again and again — and they are learnable.
A few of the patterns I teach my Trading Challenge students are the Supernova, the Stair Stepper, the Snore, and the Crow. You can learn the basics of these chart patterns in my Penny Stocking 101 guide.
Of course, it’s easy for me to rattle off a few patterns and tell you where to learn about them. But it’s up to you to go do your homework. Once you understand a pattern, see if you can identify it with stocks on your watchlist.
#3 Develop a Low Float Stock Strategy
It’s important that you set yourself up with a trading strategy. This applies to every trade.
You want to know your entry and exit points. You want to understand the catalyst. You want to know the pattern. In other words, you should develop a plan for the trade.
Here’s a hint that will help you learn from mistakes and wins alike: Write down your strategy before you enter a trade.
And if you’re just starting out and are still in paper trading mode, create the killer habit of documenting your trades now, before you trade for real — it’s an invaluable tool.
What are you looking for and what should you be keeping track of? I use an acronym for the word PREPARE to help me get started. You can find it in my Trader Checklist and it can help you set a strategy. Preparation is key! I can’t emphasize this enough!
I want to be clear about this: I don’t trade on gut feelings, over-hyped press releases, or message board tips. I use indicators, patterns, and proven strategies.
Just knowing about float shares and patterns is not a strategy. Your strategy is the entire plan — start to finish — for each individual trade.
#4 Use Technical Analysis
Technical analysis is my go-to method when it comes to trading low float stocks. In this type of analysis, you read the stock charts and use certain indicators to determine whether the setup is right.
But I don’t want you to overcomplicate this. There are a lot of bad, over-complicated indicators out there that I never use. For example, RSI (relative strength index), Bollinger Bands, and Fibonacci retracements never find their way into my research.
Keep it simple.
I like to buy stocks with good news — when they’re breaking out to new highs. I like to short pump and dumps when they have their first red day or bad news signaling the beginning of the end for them. News can be a powerful indicator.
Technical indicators I do look at are things like recent support levels or resistance levels. Maybe moving average or VWAP (volume weighted average price) for a swing trade (a trade that I hold overnight or even for a few days). I also look for morning spikes and gaps.
It’s not that I don’t think some of the more complex technical indicators aren’t valid. But they don’t serve the kind of trading I do.
#5 Use Fundamental Analysis
While I don’t use fundamental analysis as much as technical analysis, I do encourage you to understand it and make it a part of your arsenal. Fundamental analysis is an understanding of company fundamentals. It includes things like balance sheet, projected revenue, and management style.
Company fundamentals can affect the stock price. They can also give you food for thought when it comes to trading. You might see something to support your belief that a run has legs. You might also see why a stock run won’t last and be prepared to play the crash and burn.
#6 Develop a Stock Watchlist
A stock watchlist is essential for trading. You won’t make a play on every stock you watch — more like maybe one out of every five or 10. Maybe even one out of 20.
But if you’re not already watching a stock, doing your research and due diligence, and creating a strategy for your play, it’s easy to get in a bad situation. Your watchlist is an essential part of your preparation.
How would you like to get my list of stocks to watch for the week — for free — every Sunday? We just started this and I’m really excited because it’s going to help many people who want to start but aren’t sure what to do first.
It’s friggin’ awesome and it’s called TimSykesWatchlist.com. Head over there. All it takes is your email address so I can send you my watchlist for the week. Then you can start keeping track of these stocks and comparing them to the knowledge you’re gaining.
#7 Use a Stock Float Screener to Find Breakouts
We live in amazing times …
That said, don’t waste time doing things the wrong way!
When I first started I sometimes had 3 or 4 different computers going, with internet browser windows open to different websites and tools. Things are a lot simpler now. You can use a stock screener to find low float stocks that meet your setup criteria.
Personally, I use StocksToTrade.
Using the StocksToTrade built-in screener, you can set a screen to find:
- low float stocks
- with news
- with volume
- already up a certain percentage and …
- with a strong news catalyst
Boom! Totally kickass!
Tim Bohen shares how to do it in a video on their blog called How to Configure the Low Float Screener.
It’s awesome because you can let the software do all the hard work! And I even helped with StocksToTrade’s design, so, in my ever-humble option, you KNOW it’s gotta be good.
#8 Never Stop Learning
You might realize by now that there are some foundational principles by which I live. And I recommend them to all my students. One is “never stop learning.” There’s always something to learn to be a better trader. I still study every day.
This is such a crucial concept that I continuously harp on about it. But if you look at the top people in any field you’ll see it’s the same — they all keep learning, practicing, and improving. Constantly. If you want to boost your chances of succeeding at this then you have to keep learning … it’s not even an option.
Every one of my successful Trading Challenge students has that same attitude.** None of them show up and say “I know it all.” No. They show up every day with the attitude of “What can I learn today that will help me for the rest of my life?”
Think about that. It’s why I love my students so much: they’re DRIVEN.
The Bottom Line
Understanding stock float and floating shares is an important part of your trading education.
So make sure you really understand this!
The float has a huge impact on supply and demand when something causes a price movement. The lower the float, combined with increased volume, makes big price swings possible.
That’s why low float stocks rock.
Are you new to trading? I love to read your comments and share my knowledge. Comment below and let me know how things are going for you!