How does the public float impact market capitalization and outstanding shares?

If you're new to trading, you might be wondering how the public float impacts market capitalization and outstanding shares. In this blog post, we'll explain what each of these terms means and how they're related to each other.

Public Float

The public float refers to the number of shares that are available for trading in the open market. This includes shares held by individual and institutional investors, as well as shares held by company insiders that are not subject to any trading restrictions.

The public float is an important metric because it helps determine the liquidity of a stock. A stock with a larger public float is typically more liquid than a stock with a smaller public float because there are more shares available for trading.

Market Capitalization

Market capitalization, or market cap for short, is a measure of a company's size that's calculated by multiplying its current stock price by the number of outstanding shares.

Market cap is important because it provides a snapshot of the market's overall valuation of a company. A company with a higher market cap is generally considered to be more valuable than a company with a lower market cap.

Outstanding Shares

Outstanding shares refer to the total number of shares that a company has issued, including those held by insiders and those that are not available for trading in the open market.

Outstanding shares are important because they're used to calculate a company's market cap. The more outstanding shares a company has, the higher its market cap will be, assuming the stock price remains constant.

How Public Float Impacts Market Capitalization and Outstanding Shares

Now that we've defined each of these terms, let's explore how they're related to each other.

The public float is a subset of a company's outstanding shares. It only includes shares that are available for trading in the open market. So, the larger the public float, the larger the potential market cap of a company, assuming the stock price remains constant.

For example, let's say a company has 100 million outstanding shares, and 50 million of those shares are held by insiders and not available for trading in the open market. The company's public float would be 50 million shares.

If the company's stock price is $10 per share, its market cap would be calculated as follows:

Market Cap = Stock Price x Outstanding Shares Market Cap = $10 x 100 million Market Cap = $1 billion

However, if we calculate the company's market cap using only the public float, we get a different number:

Market Cap (Public Float) = Stock Price x Public Float Market Cap (Public Float) = $10 x 50 million Market Cap (Public Float) = $500 million

As you can see, the company's market cap is lower when we use only the public float in our calculation.

Why Public Float Matters to Traders

Traders pay close attention to a company's public float because it can impact the stock's liquidity and volatility.

If a stock has a small public float, it can be more easily influenced by changes in supply and demand. For example, if a large investor decides to buy a significant portion of the available shares, the stock price could rise quickly. Similarly, if a large investor decides to sell a significant portion of their shares, the stock price could drop quickly.

Conversely, a stock with a large public float is less susceptible to dramatic price swings because there are more shares available for trading, which makes it more difficult for any one investor to significantly impact the stock's price.

Conclusion

It's important to note that public float, market capitalization, and outstanding shares are not the only metrics that traders should consider when evaluating a stock. Other factors, such as a company's financial performance, industry trends, and overall market conditions, can also impact a stock's price and should be taken into account when making investment decisions.

Understanding the relationship between public float, market capitalization, and outstanding shares can help traders make more informed decisions when buying and selling stocks. By keeping these metrics in mind, traders can better assess a stock's potential liquidity, volatility, and overall value, and make more effective investment decisions as a result.