How To Invest: Remember To Check A Stock's Float

Investor's Business Daily

The laws of supply and demand govern the price of most items, whether it's strawberries, bachelor's degrees or stocks.

Because supply and demand are so important, IBD has incorporated them into its investing strategy.

When you see the S in CAN SLIM, you should think: supply and demand. And you should include the S-factor as you evaluate stocks.

Check out their float, which is the number of shares publicly available for trading. It's a different figure than the number of shares outstanding, which includes restricted shares.

You generally want to have a bias toward stocks with reasonable — i.e., not excessive — floats.

After all, it's simply harder for a stock with a massive float to make a big move. If you can find a company that's otherwise the same but has a smaller supply of shares, that's the one that is more likely to show dramatic action.

Of course, that action could be to the downside or the upside, so you don't want to go too far.

It's best to steer clear of stocks that are thinly traded.

IBD's rule of thumb is to look for issues that trade at least 400,000 shares a day. That gives institutions (funds and other big investors) room to jump in, but also means one big dog can't do as much damage as it would to a thinly traded stock.

At the other end of the spectrum, keep in mind that stocks with huge floats have advantages. They can serve as nice defensive plays in volatile times, since they're relatively slow-moving. They probably won't score huge gains, but also could move downward in a more muted fashion.

Look at the stocks that have been making the IBD 50 lineup for an idea of reasonable floats. You'll see a lot in a range of about 20 million to 150 million shares.

The float for regional bank Texas Capital (TCBI) is 38 million shares. Watson Pharmaceuticals (WPI) has a supply of 125 million.

You won't see a lot of IBD 50 names with floats of about 1 billion shares or more. Apple (AAPL), of course, is around 930 million, but it's a highly unusual company.

Many of the big winning stocks of past decades by now have grown to have huge floats.

Networking equipment giant Cisco Systems (CSCO) has a float of about 5.2 billion shares, while Microsoft's (MSFT) is about 7.5 billion, and it has 8.4 billion shares outstanding.

Back in October 1986, Microsoft had 25,520 shares outstanding and a float of just 5,614 shares.

The software maker staged a during that month and handsomely rewarded anyone who spotted the opportunity.

The rather limited supply of shares helped Microsoft enjoy a strong run. More recently, it's mostly shown sideways action for many years and stayed well off its peak reached in December 1999.

Floats Generally Bigger NowThat doesn't mean you should start looking around for stocks with a float of less than 6,000 shares, as Microsoft had in the 1980s.

Over the years, floats generally have grown. Some of that has come simply from greater interest in the stock market. More players, from funds to individuals, have gotten involved in stock investing.

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