Free float - free float. What does it say about the shareholder structure?

Some investors recommend looking for companies with a low "content" of free float in the overall shareholding structure, others on the contrary. It is worth knowing what the "mythical" term that appears so often in shareholders' discussions really is. Where to find information about it? Can you build an investment strategy on its basis? Is it better low or tall? You can learn about this and much more about free float in the following article.

Free float, what is it?

As many as there are investors, so many opinions on free float. Let's start with the concept itself first. Free float is nothing more than the number of shares held by individual (minority) investors, whose share of the total purchased securities does not exceed 5% of the issued by the company. It is worth adding that this indicator (free float) excludes the so-called reserved shares. Simply put, these are securities of a given company assigned to, for example, its managers. They can be, for example, a form of remuneration or bonuses of a given senior manager. In addition, the free float is not included registered shares, i.e. owned, for example, by employees and people closely related to the enterprise. We can find it on the websites of brokerage houses or companies. This information is also available on well-known analytical websites.

Which free float is better for investment?

Opinions on this subject are strongly divided. Beginner investors do not pay attention to him, and the more experienced ones are usually divided into two camps. Consider the first example where the amount of free float is small. So the key question is, what level of free float is considered low? There is a strongly theoretical and conventional 50% limit. In my opinion, it is very general, due to the "equal division" of the shareholder structure. Speaking more subjectively, low free float is one that fluctuates around 40% -35% and less. Is it good or bad? It all depends a lot on preferences.

On the one hand, it can be argued that the low level of shares in the hands of minority shareholders causes liquidity problems. One might also disagree with this claim, given that fewer shares in circulation equate to more trades on it. In my opinion, this issue is highly controversial. It is difficult to talk about a large number of orders for a specific value, when it does not arouse interest among potential buyers.

A low free float is also equivalent to a few or one large shareholder. This type of shareholding is called concentrated and it is typical for small and medium-sized companies. A dozen or so years ago, there was a fairly high fashion on the stock exchange of acquiring companies with low free float. It was believed that a large shareholder would run the company in such a way as to increase their price as quickly as possible and sell his shares at a profit. The dark side of a small amount of free shares is their susceptibility to economic fluctuations and manipulation.

Dispersed shareholding

Large enterprises usually have a large share of minority shareholders (let's take a free float above 50% as a benchmark) in the shareholding structure of a company. The vast majority of companies with such parameters are located in WIG20 index, which is identified with the highest liquidity of the securities listed there. As potential advantages and disadvantages of this situation, we can consider all the reciprocals of low free float. However, when choosing a specific security for a portfolio over free float, we should think when we intend to buy a stake above 2%. Why? Suppose there is a company that is attractive to us, whose free float amounts to 30% and one whose potential return on invested capital is slightly worse, but has a free float of 70%. Considering the relationship between liquidity and the level of securities in the hands of minority shareholders, we are more likely to buy securities with a higher degree of liquidity, giving up the potentially higher rate of return.

Going further, let's assume that we have 1000,00 PLN at our disposal and both companies offer us 100 shares for this capital (10 PLN per share). To simplify our calculations as much as possible, let's assume that both companies enjoy similar interest and the total number of their shares is 10. Is it worth giving up a better investment at the expense of theoretically greater liquidity? The answer I think is obvious to everyone and is definitely not. The first company (000 x 000%) holds 10 shares in the hands of minority shareholders. Will the willingness to sell / buy 000 securities be extremely difficult?

Summation

In my opinion, free float (we are not talking about extreme situations) is important to us if we plan a larger investment and want more liquidity. The shareholding structure itself is also important in assessing the potential interest in the company's shares, which will also be helped by the observation of changes that have occurred in it. I think that you should approach free float not strictly analytically, but psychologically. When we notice that the management or the owner have a large share in the total shares of the company, it provides some information that the management believes in its further development. There can be countless such conclusions and we ourselves should find a "golden mean" in the free float that is best for us.