What it is:
A company's float is an estimate of the number of outstanding shares available for the public to trade.
How it works (Example):
Float, sometimes referred to as free float or "public" float, does not include restricted shares (shares owned by company officers, management, and other various insiders) because it's assumed that those shares are being held on a very long-term basis.
Float is generally described as all shares held by investors, other than restricted shares held by company insiders. The equation for float is very straightforward:
Float = Outstanding Shares - Restricted Shares
So if Company XYZ has 100 million shares outstanding, and 30 million are considered restricted shares, then the float would be the remaining 70 million shares available for trading (100 million - 30 million = 70 million).
Why it Matters:
Looking at a company's float can be very helpful to prospective investors because it provides some insight into the stock's volatility. Stocks with small floats 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 floats tend to be less volatile.
Also, institutional investors usually prefer to invest in stocks with a large floats, since they can purchase or sell a significant number of shares without impacting the share price much.