Day traders use different strategies than long term traders to maximize their earnings. Rather than building a diverse portfolio that will continue to grow over time, they tend to look for opportunities to buy and sell stocks within weeks, days and even hours.
Low float stocks are popular with day traders because they can be used to earn continuous profits throughout a single trading session.
Let’s explore what low float stocks are, some ways to find and trade them and some of the risks and benefits to these types of trades.
Related: A guide to high-risk stocks
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What are low float stocks?
The float of a stock is a measure of the shares of a particular stock. It indicates the number of shares of a stock available for trading. The measure doesn’t include closely-held shares, which are shares owned by controlling investors or company owners.
The calculation of the floating stock is often used on stock indexes as the basis for figuring out the market cap (the total value of outstanding shares in dollars). The S&P 500 is one index that does this.
Low float stocks have a small number of shares available for trading. These tend to be stocks that are mostly held by controlling investors such as directors and employees, leaving only a small percentage of the stock available for public trading.
Floating stock is calculated by taking the total number of shares of a company and subtracting any restricted and closely-held shares.
Since low float stocks have fewer shares available, it can be harder to find a buyer or seller for them. This may make them more volatile, which appeals to day traders. The bid/ask spread of low float stocks tends to be high as well.
A float of 10-20 million shares is generally considered to be a low float, but there are companies with floats below one million. Some larger corporations have very high floats in the billions.
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Understanding shares outstanding
Another stock market term that helps explain low float stocks is shares outstanding. Shares outstanding is the total number of shares issued by a company, including those that can’t be traded.
The float is the number of shares out of the shares outstanding that are available for public trade. This is known as the float percentage. Companies might have a large number of shares outstanding, but only a small percentage of floating stock.
The amount of floating stock a company has can also change over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a split or reverse split this will also increase or decrease floating shares.
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Floating stock example calculation
If a trader looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”
Looking at Amazon (AMZN), the company’s balance sheet shows outstanding shares and floating stock shares. As of March 2, 2020, Amazon had:
• 498 million shares outstanding
• 421.97 million float shares
In the case of Amazon, this is a high float stock, with 84.73% of the stock available for trade. This would not be a good choice for day traders looking for low float stocks.
To show an example of a low float stock, let’s look at the company JW Mays Inc. (MAYS), which is listed on the Nasdaq exchange. The company has 2.02 million shares outstanding, and 403K float shares.
This is 19.95%. However, JW Mays may or may not be a good choice for day traders, depending on technical analysis and whether the company has any news stories coming out.
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Not all low float stocks are created equal
A low float stock isn’t automatically good for day trading. There are a few factors traders look for when deciding which stocks to trade. Two of the main things traders look at are:
• High relative volume: The risk and challenge of trading low float stocks is that they don’t always have high liquidity, since there aren’t many shares available for trading. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell, and they can’t take advantage of news catalysts with a significant buy or sell move. If a stock’s price changes but there isn’t a lot of trading volume, it may not be a good pick. Relative volume shows a stock’s current volume in comparison to earlier time frames.
• News catalysts: Positive or negative news about a company is often what makes a low float stock increase or decrease most in a short amount of time. The saying “buy the rumor, sell the news” comes into play with low float stocks as well. Traders may make the mistake of buying or selling when news comes out about a company, but it may be better to buy and sell a stock when rumors are first circulating. Day traders keep a close eye on the stock market and corporate news to see which stocks are likely to make moves. The great thing about low float stocks is that a news event can cause them to move anywhere from 50% up to 200% in a single day, since they are in low supply.
• Float Percentage: Each trader has their own preferences for float percentage, but most look for a percentage between 10 and 25%. This is the percentage of the total shares of stock available for trading.
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How low float stocks are traded
Day traders tend to actively enter and exit positions on a daily basis. When trading a low float stock, a trader might buy and sell the same stock multiple times in a single day, then move on to a different low float stock the next day.
Many traders will plan out their profit targets, support and resistance ahead of time, and set stop losses to reduce risk.
Just as with any trade, traders can look at technicals like candlesticks and moving averages to see if a stock looks bullish or bearish. It’s important to pay attention to technical analysis and not just buy or sell based on rumors and news.
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Finding low float stocks
Finding and evaluating stocks to trade requires some knowledge and experience. There are a number of platforms that offer trading of low float stocks.
Some of these allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for low float stocks with a float under 50 million and a relatively high volume. Penny stocks under $5 are very popular with day traders.
Traders can also look to watchlists for ideas about which low float stocks to trade. Two popular watchlists are:
• Reuters’ Free Scanner: Free to register. Users can find low float stocks by scanning with the filter ‘float’
• Trade Ideas: This site has multiple low float stock lists for the U.S. market. It highlights stocks that are moving so that traders can capitalize on opportunities.
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The risks of low float stocks
Every investment comes with risks, but low float stocks are particularly challenging to trade.
Low float stocks have high volatility and can dramatically change price within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, their entire portfolio could get wiped out.
That being said, low float stocks have huge profit opportunities. Traders can see gains of 50 to 200% in a single day.
Trading low float stocks requires a daily look at market news, since the stocks good for trading one day may not be ideal the next. Looking at both the news and technical indicators is crucial for trading success.
Low float stocks may be great for day traders, but not for long-term positions. Investors typically shouldn’t plan on holding them overnight. Day trading is inherently very risky and can result in large losses.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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