It is too simplistic to throw free float about3 Jul 2020 13:37
https://tradingsim.com/blog/stock-float/
Can the stock price be manipulated with float?
One of the questions that come to mind is whether one can manipulate the price of a stock based on the float. A reduction in the float can almost immediate raise the price of stock. This might seem contrary to the notion that higher the float, bigger the price.
This is not the case however. For example, when risk averse investors are on the short side of the stock, reducing the float can squeeze these investors out of the market.
This research paper of Float manipulation and stock prices gives insight into how firms can expand or shrink the float. The research paper takes a look at Japanese stock listings and looks at the price impact when firms reduce their float between 0.1% up to 100% for periods of one to three months.
The research paper shows that consistent with the theory, the price of a stock tends to rise when the float is reduced and conversely, the price of the stock falls when the float is increased.
The returns of the stock are also said to be cross-sectionally related to the reduction in the float.
There is evidence that firms tends to issue equity or redeem their convertible debts when the float is low. The paper follows through showing that firms have strong incentives for manipulating the stock price via its float.
What is a low float stock?
A low float stock as the name suggests indicates that the number of shares outstanding are low. For such stocks, the daily and average volume tends to be low. The low volumes of such stocks lead to volatility and as a result, wide bid and ask prices.
There is a myth that low float stocks are mostly stocks on the pink sheet or OTCBB market listings.
However, this is not the case. In some cases you can find some micro-cap stocks with listings on the main exchanges such as the NASDAQ or the NYSE. A stock can also be low float if for some reason the float reduces relative to its usual average.
While there is no actual definition, a stock is a low float stock which has fewer than 15 million in tradable shares. It is once again important to understand that shares outstanding measures all the shares available. This is inclusive of both tradeable and non-tradeable shares.
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Therefore, shares outstanding are typically higher when you compare to the float. Stocks that have low market cap and low float are ideal for volatility and price manipulation. They are also not the ideal stocks to trade as they attract higher bid and ask prices.
Can company increase or decrease its float?
The answer to this is yes. Companies can raise or decrease their float in two ways.
A company can raise the float by issuing new shares and it can reduce the float by announcing buy back of the shares. Other examples include a company announcing a stock split which could impact the float.
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