Saturday, October 3, 2020

Smart traders pay attention to this number...

Hint: it's not the price per share...

October 02, 2020

Trading's a Puzzle. Here's Half of the Solution...

✔️ My take on the most important number to know before trading a stock…


✔️ Supply and demand. How to navigate the uncertainty...


What's the most important number to consider when trading? 


Hint: it's not the price per share.


If you ask me, the float, or shares publicly available to trade, is the single most important figure to consider when making a trade. And yet most traders don't understand this number… 


Be better than the many traders who fail. Learn what float is and why it matters — it can clue you in on the stocks most likely to see price spikes.

 

Remember ... markets move based on two forces: supply and demand. That's it. 


Changes in supply and demand are the forces that change prices. Nowhere is this more evident than in the stock market.


The lower the supply, the easier it is for a change in demand to drive a massive price move.


Starting to see why this might matter for traders? Let's explore what float is, why lower is often better, and a few other important considerations...

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What is 'Float'?


The float is the number of shares available to the public for investing and trading. But to really understand that, let's back up for a minute...


Every publicly-traded company has a valuation known as the market cap. The market cap is the number of shares outstanding times the current stock price. For reference, here's that formula:


[shares outstanding] * [share price] = Market Cap


Here's the thing. The outstanding shares aren't all available to the public.

 

Most companies have at least some shares that are restricted or held by insiders. These shares aren't available to the public, so they are not considered part of the float.


The float is the shares outstanding less the restricted shares and those held by insiders. Here's the formula for float:


[shares outstanding] - [restricted shares] - [insider held shares] = Float


Whew! I know that's a lot of math — but it's important that you understand the difference between shares outstanding and the shares that are actually available.


Now that you understand what float is ... why's it so important?

Supply and Demand


Supply and demand are the only two forces responsible for changing the price of a stock:


  • Increased demand sends the price up.

  • Increased supply sends the price down.


Low supply and high demand can cause the price to rise quickly. The lower the supply and the higher the demand, the faster the move can happen.


The float represents the total available supply. If you know the float, then you've got half of the puzzle figured out.


I gave you an equation earlier, but you don't actually have to do the math yourself. Sites like Yahoo Finance, Finviz, and Marketwatch all provide the last known float for every listed stock, at no cost.

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What's a Low Float Stock?


As a general rule, I consider any float under 20 million to be 'low float.'


There are exceptions to every rule, but consider this...


It takes less buying power to trade five million shares in a day than 50 million shares. So a stock with a 5 million share float can be affected easier than a stock with 50 million shares.


A low float stock has a small supply of shares. So when new demand comes in, there often isn't enough supply for all the new buyers. This sends the price up.


The only way to attract more sellers is to increase the price. Sellers unwilling to sell for $1 may reconsider selling for $2.


Every time you add a stock to your focus list or watchlist, make a note of the float. Then pay attention to the volume throughout the day.


When the volume — a sign of demand — exceeds the float, it sets up a best-case scenario. These situations can potentially cause a price increase by 20, 50, 100% ... or even more. All in a single day.

Changing the Float


Yep: float can change. Here are the two main reasons the number might shift:

  1. It's an IPO. Directly after an IPO (initial public offering), early investors are restricted from selling their shares. Once the lock-up period ends, typically after 180 days, these shares become fair game.

    Early investors usually buy at very low valuations. When the company finally goes public, these investors may be sitting on a huge profit and are ready to cash out.

    Once the lock-up period expires, watch for increased selling and the float to increase.

    For instance, Beyond Meat, Inc. (NASDAQ: BYND) went from $105 to $82 per share on October 29, 2019 — the day the lock-up period ended.

  2. Insider Selling. The other reason the float can increase? Insider selling.

    The good news? You can get clued in on some selling activity. Company executives must disclose all their buying and selling to the SEC. These are public filings that are readily available.

    Insiders can sell whenever they want, but they must disclose the transaction within two business days. So keep in mind — there's no way to know for sure exactly when they're selling.

The lesson I want you to take from this? When you see a huge price spike, you can assume that the majority of the shares outstanding are in play.


The insiders hold stock for the same reason as the rest of us, to make a profit. When a stock's price spikes, it can become attractive to insiders.


Everyone has a price! 


So on a truly crazy stock like Eastman Kodak Company (NYSE: KODK) or SPI Energy Co., Ltd. (NASDAQ: SPI), pay attention to the shares outstanding and the float. When the price reaches unprecedented levels, always assume all shares are in play.

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Do Your Homework


The float can tell you a lot about the balance of supply and demand with a given stock. Take the time to look it up, every time.


It's easy to get distracted in the stock market. But remember — supply and demand are the only things that actually move stock prices.  


Increased demand can drive the price up; increased supply can drive the price down.


Float can give you an idea of the supply. By cross-referencing this with the trading volume, you can get a better idea of the potential demand. 


Yes, the float provides a metric that can help you create a thesis and gauge your risk. But remember: you can never be certain of anything in the market. Always have a plan, and always be willing to cut losses if the trade goes against you! 


Float on,


Paul Scolardi

Editor, Swing Trade Millionaires

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