What it is:
A company's free float refers to the number of outstanding shares that are available to the public for trade.
How it works (Example):
Free float is sometimes referred to as float or public float.
The equation for free float is as follows:
Free float is generally described as all shares held by investors, other than restricted shares held by company insiders. It does not include restricted shares, which are owned by company management, officers and other various insiders because it's assumed that those shares are being held on a very long-term basis.
For example: if Company XYZ has 100 million total shares outstanding, and 30 million are restricted shares, then the free float would be the remaining 70 million shares available for trading (100 million - 30 million = 70 million).
Why it Matters:
A company's free float is important to potential investors because it offers insight into the company's stock volatility. Stocks with small free float tend to be more volatile because there are only a limited number of shares that can be bought or sold in the event of major trading news. For the same reason, companies with larger free floats are generally less volatile.
Institutional investors prefer to invest in stocks with a large free float, as they can purchase or sell a significant number of shares without heavily impacting the share price.