How can you use a low float stock as part of your trading strategy? First, it will be helpful to know what a low float stock is, then we can look at how you can use it to your advantage.
What is a Low Float Stock?
A stock’s float refers to the number of shares that are available for trading. The float is calculated by subtracting closely held shares and restricted stock from a company’s total outstanding shares.
Closely held shares are shares owned by insiders, large firms, or employees. Restricted stock is stock that cannot be traded because of some restriction. A lock up period after an initial public offering is an example of such a restriction.
A low float stock is a stock that has a small number of shares available for trading. These stocks are often volatile and can be hard to find buyers and sellers for the shares. This results in large spreads and low volume. A rule of thumb in the day trading community is that a stock with a float of 10 – 20 million shares is considered a low float stock.
Risks and Rewards
Low float stocks are popular with day traders because of their volatility. The low number of shares available can cause these stocks to move quickly and have huge gains. Sometimes they will double or triple in value in one day! Anything that acts as a catalyst can increase demand which often translates to a huge price gain.
Beware that these stocks also come with some risks. Because of the low volume of shares you could experience slippage when trying to execute trades. Trading in low float stocks requires that you pay constant attention to your positions and that you study and consider many other factors about the stock. A lot of traders won’t hold low float stocks overnight. They are in and out of a position on the same trading day. These are not buy and hold investments in most cases.
If you are a seasoned trader and are willing to put in the work to successfully trade low float stocks, then they can be rewarding. Their huge price swings and volatility can result in large profits in a short time frame. But there are other factors to consider when trading stock. Just because a stock is low float it doesn’t mean that is translate into a good investment. Beware of the pitfalls and do your research before diving in.
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