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In the context of
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
s, the public float or free float represents the portion of
shares In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of ...
of a
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
that are in the hands of public investors as opposed to locked-in shares held by promoters, company officers, controlling-interest investors, or governments. This number is sometimes seen as a better way of calculating
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
, because it provides a more accurate reflection (than entire market capitalization) of what public investors consider the company to be worth. In this context, the ''float'' may refer to all the
shares outstanding Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
that can be publicly traded.


Calculating public float

The float is calculated by subtracting the locked-in shares from outstanding shares. For example, a company may have 10 million outstanding shares, with 3 million of them in a locked-in position; this company's float would be 7 million (multiplied by the share price). Stocks with smaller floats tend to be more volatile than those with larger floats. In general, the large holdings of founding shareholders, corporate cross-holdings, and government holdings in partially
privatized Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
companies are excluded when calculating the size of a public float.


Public float in the United Kingdom

There are certain regulations to offer public floats, though these regulations might differ from region to region. For instance, to offer public floats in the United Kingdom, a company must be incorporated, i.e. be a
public limited company A public limited company (legally abbreviated to PLC or plc) is a type of public company under United Kingdom company law, some Commonwealth jurisdictions, and the Republic of Ireland. It is a limited liability company whose shares may be fr ...
under UK law. Also, the company should have published or filed audit accounts for at least a three-year period, have trading and revenue earning records for at least three years, its higher management and directors must be competent enough to run a business at that scale, and the company must show that it has a working capital for at least 12 months. Moreover, once the company is listed, the business must be independent from any shareholder with controlling interest (anyone owning more than 30% of the company shares), and after the company is listed, at least 25% of its shares must be in the hands of the general public, that is public float, and the company must have a total market capitalization of not less than £700,000.


Advantages of public floating


Greater access to funds

By offering a public float, companies gain access to new and large capital, as the general public can invest in the company. This new capital is then used to increase the company's profits


Opportunities to reduce debt

By public floating, a company gains access to interest-free capital as there is no interest to be paid on shares. Though a dividend may be involved, the terms of dividend liability are far more flexible than terms for loans. Along with this, shares are not considered as a debt, and by public floating, companies can reduce their debts creating a better asset to liability ratio.


Enhancement of credibility and higher public profile

By public floating, companies can enhance their credit image. As banks and other credit providing institutions provide credit, more often to a public limited company along with this, sometimes favorable terms are also offered by credit providers because of public limited company status. Along with enhanced credibility, companies can also get higher media coverage and attention of general public.


Disadvantages of public floating


Company is open to market fluctuations

By public floating, companies are vulnerable to threats of speculations and market fluctuations. During the 2008 financial crisis, several companies went bankrupt because of fluctuations in the stock market, severely limiting their operating capital to the extent that they were unable to pay their creditors and were forced to liquidate their operational assets.


Costs of public floating

Costs of company registration are also very high making it difficult for certain small businesses to float shares. Along with higher costs, processes of registering and running a company are also very complex. For example, in the UK, in order to run a
public limited company A public limited company (legally abbreviated to PLC or plc) is a type of public company under United Kingdom company law, some Commonwealth jurisdictions, and the Republic of Ireland. It is a limited liability company whose shares may be fr ...
, a register of the directors, shareholders, and any shareholder votes, as well as all details of the company's finances must be compiled and kept for a minimum of six years. Along with this, a comprehensive accounting record is also needed like sales and whom they are made to (until and unless it is a retail business), purchases and from whom they are supplied, stock and debts – all of them are necessary to be provided. Along with all these costs, taxes are also to be paid while a company is public floating. For instance, in the UK a company has to pay corporation tax which is 20% if the profit per year is £300,000 or less and 21% if profit is above £300,000.


Pressure to perform

Public floating also increases pressure on a company to perform. Whenever the general public, as company shareholders, demand dividends without keeping the company's economic circumstances in proper perspective, it increases performance pressure on the company. Secondly, sometimes companies provide false financial reports to sell shares which lead towards further complications in market. In 2005, AIG had to pay a fine of $1.7 billion as a result of improper accounting. Additionally, Lehman Brothers went bankrupt in 2008 after using a small firm to secretly manipulate its balance sheets. Both cases illustrate that, as a result of pressure to sell shares, companies may manipulate their financial statements, and later face the consequences (Lehman Brothers' bankruptcy in 2008, AIG's bailout by the U.S government in 2008).


Less public float

Less public float may cause illiquidity of stocks of companies due to the low public holdings. One may not be able to transact buy or sell orders on a respected stock exchange.


See also

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Concentrated stock In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. ...
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Market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
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Open market The term open market is used generally to refer to an economic situation close to free trade. In a more specific, technical sense, the term refers to interbank trade in securities. In economic theory Economists judge the "openness" of markets ...
* Restricted stock *
Shares authorized The authorised capital of a company sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its con ...
*
Shares outstanding Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
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Treasury stock A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings). Stock repurchases are used as a tax efficie ...


References

{{stock market Corporate finance Fundamental analysis Stock market Float hu:Részvény