Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Risk in Low-Float Stocks

admin by admin
May 14, 2012
in Uncategorized
0
0
SHARES
8
VIEWS
Share on FacebookShare on Twitter

Money Morning Article of the Week

by David Zeiler, Associate Editor, Money Morning

While often ignored in the financial media, “low-float” stocks should be in every investor’s vocabulary.   The reason is simple. Low-float stocks tend to be much more sinking-boatSMALLvolatile than stocks with larger floats.

Simply put, the “float” of a stock is the number of shares available to the public for trading.   It doesn’t count shares owned by company officers and insiders.   In this case, it boils down to a question of supply and demand. Because of their limited supply, stocks with small floats can make major moves-either to the upside or downside.

Some companies exploit that same volatile potential in their initial public offerings (IPOs). Last year many tech companies used low floats in their IPOs to ensure a big first-day pop in the stock price.“The more you constrain demand, the more likely, especially in a retail-oriented name, you’re going to see a spike in price,” Paul Deninger, a senior managing director at Evercore Partners Inc., told Bloomberg News.

The strategy worked for LinkedIn Corp. (NYSE: LNKD) last May.

With a tiny float of just 7.8 million shares – less than 10% of the shares outstanding – LinkedIn more than doubled its IPO price in its first day of trading.

An even more extreme example of using a low float to drive up an IPO was Caesar’s Entertainment Corp. (Nasdaq: CZR) in February.

The initial float for Caesar’s was just 1.8 million shares, a mere 1.4% of its shares outstanding. CZR doubled in price during its first day, and closed up 71%.

“I’ve never seen anything like it,” Morningstar Inc. analyst Chad Mollman told The Wall Street Journal, in reaction to the low float. “I’ve been following IPOs, and we couldn’t believe it when we saw it. You’re creating an artificial demand and supply imbalance that leads to speculation.”

The Perils of Low-Float Stocks

But when share prices get inflated by such artificial means, the bubble-like valuation leaves it vulnerable to steep and sudden drops. If a low-float stock gets hit with bad news, it can plummet as quickly as it rose.

That’s one reason both Caesar’s and LinkedIn have significantly increased their floats since their IPOs, though both are still on the low side. LinkedIn’s float is up to 65.39 million shares, about two-thirds of the shares outstanding, and Caesar’s stands at 24.86 million, about 20% of the shares outstanding.

Companies that keep their stock float low, however, never shed the risk of a rapid loss in value. And it’s investors who pay the price.

Take Travelzoo Inc. (Nasdaq: TZOO). Its unusually low float – just 7.46 million shares – helped propel TZOO briefly over $100 a share last April.

But a bad earnings report last July knocked Travelzoo down 22% in one day. And it only got worse from there.

Successive earnings reports disappointed as well, causing TZOO to surrender a total of 75% from last July to this April.

Another case in point is Netflix, Inc. (Nasdaq: NFLX). Its float is about 54 million, below average for a stock that has an average daily trading volume of about 6 million shares.

As of July of last year, the low float was a factor in pushing Netflix close to $300 a share.

The stock began to erode last summer when concerns about the company’s subscriber base started to surface. By fall it was a rout, with NFLX plunging 35% in one day in October. Netflix bottomed out in the low $60s at the end of November, and currently trades at about $73.

You may have noticed that the range of the floats for those stocks is fairly far apart. Yet both are generally considered low-float stocks.

This raises a question that doesn’t have an obvious answer: Exactly what constitutes a low-float stock?

Defining a Low-Float Stock

Unlike more widely known categories like market capitalization, low-float stocks don’t have a specific definition.

Investopedia, for example, only defines a stock float while helpfully noting that “stocks with smaller floats tend to be more volatile than those with larger floats.” But the site does not elaborate.

Some define low float stocks as those with fewer than 10 million publicly traded shares, but that includes a lot of penny stocks that most retail investors shy away from.

There’s also the factor of trading volume.

For a low-float stock to be volatile, it also needs enough trading volume to push demand to levels necessary to move the stock price. Penny stocks, while almost always low-float stocks, usually don’t generate enough trading volume for the low float to matter.

With this in mind, Money Morning decided to create a more investor-friendly definition of low-float stocks.

We started by eliminating the bulk of the penny stocks by filtering out stocks below a $300 million market cap. To pick the stock float cutoff point, we took the stocks that fell into this category (about 2,900) and looked for a logical cutoff point about midway through, which turned out to be 70 million shares.

To illustrate the extra risk that low-float stocks represent, we then compared the volatility of the group with floats under 70 million shares against the group with floats over 70 million shares.

To measure volatility we used the beta indicator. A beta of 1 means the stock’s volatility mirrors that of the overall market. A beta above 1 means the stock is more volatile than the overall market. For instance, a beta of 1.30 means a stock is 30% more volatile than the market.

Then Money Morning filtered the results using four levels of average trading volume. As the chart shows, the low-float stocks were on average 10 percentage points higher than the larger float stocks, with the gap growing wider as trading volume increases.

That’s a substantial risk, and one investors need to consider when doing their due diligence on any given stock.

It just goes to show that even though low-float stocks are not often discussed, you can’t afford to overlook the amount of shares that are available to trade.

It’s important to remember these stocks can go down as fast as they went up. Investors who ignore this aspect of a stock may be taking a risk that they don’t understand.

Related Articles at Money Morning

  • LinkedIn’s (NYSE: LNKD) First-Quarter Earnings Preview

  • Netflix (Nasdaq: NFLX) Stock Falls Out of Favor as Members Slip Away

  • The 10 Keys to Short-Selling Profits

  • Don’t Get Burned by the New Tech Bubble
Previous Post

Study: Famous Entrepreneurial Centers are Not Small Business Friendly

Next Post

Live Market Commentary For 05-14-2012

Related Posts

eBay Unveils Sports-Themed NFT Collection
Business

eBay Unveils Sports-Themed NFT Collection

by John Wanguba
May 25, 2022
SpaceX To Get $1.7B In New Funding To Send Valuation to $127B
Business

SpaceX To Get $1.7B In New Funding To Send Valuation to $127B

by John Wanguba
May 25, 2022
Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US
Business

Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US

by John Wanguba
May 25, 2022
US Tech Giants Meta, Google, and Amazon Could Profit from Ukraine War – Media Guru
Business

US Tech Giants Meta, Google, and Amazon Could Profit from Ukraine War – Media Guru

by John Wanguba
May 25, 2022
Google Looks For New Talent To Lead Global Web3 Efforts
Business

Google Looks For New Talent To Lead Global Web3 Efforts

by John Wanguba
May 25, 2022
Next Post

Live Market Commentary For 05-14-2012

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business Coinbase crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi digital assets Elon Musk ETH Ethereum Ethereum blockchain finance funding government investment market analysis Metaverse mining NFT NFT marketplace NFTs nonfungible tokens nonfungible tokens (NFTs) price analysis regulation Russia social media technology Tesla the US Twitter

Archives

  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • eBay Unveils Sports-Themed NFT Collection
  • SpaceX To Get $1.7B In New Funding To Send Valuation to $127B
  • Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish