Low Float Stocks: What Day Traders Should Know

Day traders are very much interested in low-float stocks. They are a great way to make money throughout a single trading session. Since there aren't many low-float stocks, their prices tend to go up and down quickly and easily.

Because they are more volatile, they are great investments for day traders, especially market participants who can trade large amounts.

Low-float stocks are widespread and famous; you can find them in all markets worldwide. Let's learn how to make money by trading low-float stocks on the same day.

What are low float stocks? 

Low-float stocks are the securities that remain after a company's controlling investors have received their shares. This means that there aren't many left for the public to buy.

Investors usually consider a float of 10 to 20 million shares low, but there are companies with less than one million floats. Some of the floats of larger companies are in the billions, and you can find stocks with even lower floats on over-the-counter exchanges.

Companies with a low float often have a lot of stock owned by people. They are those people who have a lot of control over the company, like directors and employees. Thus, only a tiny amount of the stock is available for public trading. 

Because fewer shares of low-float stocks exist, investors may have trouble finding someone to buy or sell them. This could make the stocks more unstable, which day traders like. Low-float stocks also tend to have a high bid/ask spread.

Importance of trading with low float stocks

When you decide whether or not to buy a stock, it's essential to look at the float, which shows how many shares can be traded by anyone.

When there isn't much activity in stock, buying or selling at the price you want can be challenging. Traders will find it problematic when they want to take a prominent position or act quickly.

Most of the time, low float makes it hard to trade. Because there isn't much trading, it can be challenging for investors to get into or out of stocks with limited float.

Large institutions, which do most of the trading on the market, tend to stay away from low-float stocks. This is because there isn't much liquidity in them. Also, these institutions don't want the significant price changes that low-float stocks often have.

Big institutions like banks, hedge funds, mutual funds, and university endowments need liquidity and a more predictable pattern of bid-ask prices. It generally means that day traders and a few institutional investors usually own low-float stocks.

Mutual funds, pension funds, and even insurance companies typically buy large blocks of stock investments. They buy it from companies with a giant float. If they buy many shares in a company with a giant float, it won't affect the share price much.

Why should you invest in low-float penny stocks?

Most day traders don't even know about the complex low-float stock market. If all goes well and the company plans to grow and take market share from other companies in share markets, you can expect to make a lot of money by trading in low-float penny stocks.

But it's essential to remember that there are always risks when selling or buying things online.

How can you trade with low float stocks?

Low-float stocks like the Chicago rivet can be hazardous to trade. This is because it's hard to predict how supply and demand will change in the short term.

They can gap up or down on any given day because big trades happen at odd times. Thus, it can even happen when there aren't many buyers or sellers.

Most of the day, traders new to trading low-float stocks lose their positions because they can't handle the market's volatility.

Due to the high volatility of low-float stocks, limiting your risk on any one position is best, and using a few tight stop losses. Before making money trading publicly traded companies with low floats, you must put in a lot of time and work.

Make sure you learn how these stocks move, find out about upcoming "catalysts" that could change the way supply and demand work, and practice making trades in simulation mode before making actual trades.

Stay patient and wait for the proper setup before entering a trade. Have strict rules for when to get out of a trade, such as never holding a stock for more than a day. Try to use tight stop losses to limit your downside, etc.

How to find low float stocks?

One way to find low-float stocks is to look at the total number of shares the public can buy. 

You can find this number by taking a company's total number of shares and subtracting the number of shares owned by company insiders. The number you're left with is the float.

But if you don't have this information or want to look for other low-float stocks, many stock screening tools can give you the float information.

Best ways for investors to handle low float stocks

Few practices which investors can follow for handling low float stocks are:

1. Invest what you can afford to lose

You should only trade low-float stocks if you can afford to lose your investment. You are always at a high risk of losing money when you invest in the Nasdaq.

If you can't afford to lose huge amounts of money, you should probably avoid trading in low-float penny stocks. It's better because investing, in general, doesn't come with any guarantees.

2. Know what you're putting your money in

Before you trade low-float penny stocks, find out as much as possible about the companies.

Just knowing the name of the company isn't enough. When making financial decisions, you need to know their business model and how they plan to stay profitable once their stock prices go up (usually never).

3. Have patience with the companies you invest in that have a low float

Don't buy or sell all your stocks simultaneously, especially if they are low-float penny stocks. Take maximum time to make changes when needed. Thus, this will help you avoid losing money in the long run.

The stock market, like Nasdaq, can be very unpredictable. But if you keep researching the financial markets, you should be able to avoid any potential problems.

As long as you've done everything right and have a good plan, it would help if you didn't have to stress about anything going wrong with your investments. Just stay patient.

4. Keep an eye out for warning signs.

Since the relative volume of low-float stocks isn't compared to that of high-volume companies as often during day trading, there's a chance that something will hide from public view, which usually makes traders take on more risk.

Avoid all these risks, which aren't worth it, if you want a more stable portfolio where you don't have to worry about surprises.

When trading low-float penny stocks, always look out for red flags and ensure the company isn't involved in a scandal before making a big financial decision.

You can use Trade Ideas' filters and alerts to stay up-to-date on what's happening with our companies, which is very important if you want to invest in low-float stocks.

Putting money into low-float stocks is the best way to learn about them. Trade Ideas has the right tools, knowledge, and expertise for your investment needs.

What are the common risks of trading with low float stocks?

• Low-float stocks are volatile so they can move quickly up or down.

• Since there are only so many shares, good or bad news can significantly affect supply and demand.

• Scams like stock pumps and promotions could be used to sell these stocks. The intelligent thing to do is to look at the basics and do technical analysis. Know the stocks you are trading.

• Micro- or small-cap companies are more likely to have low floats. These companies aren't as well-known as large caps and usually have more risk and volatility. The risk is made worse by the low float.

Two indicators to consider for trading low-float stocks

1. Very loud

On the stock market, volume means that things are moving.

Volume is the number of times a stock's shares are traded over a certain amount of time. It is based on the fact that every buyer always has a seller. So each buy and each sell are not added to the volume separately but as a single transaction unit.

In technical analysis, volume is a vital sign. It can help you determine how substantial a price change is for a particular stock over time.

Regarding stocks with low float, the bigger the volume, the bigger the overall move.

2. A source of news

If any stock has a low float, it means there aren't that many shares of that stock available for trading. Well, this means that the demand and supply can change quickly.

So, when a juicy piece of news comes out, it can move the stock in question and cause its price to go up (or down) quickly!

Traders could make money whether the price goes up or down. You need to know which way the stock is going and have a good plan for trading.

How can you make good use of the news? First, look into the cause to see if the news is likely to spread. PR statements that only help the person making them are full of BS. You have to find out the real story for yourself.

You can also back it up with research from the stock's earnings and charts. Look for solid patterns.

When a strong catalyst is backed up by research, it can show a trading opportunity in a low-float stock. I should say something meaningful about rumors. Rumors can change stock prices, but you shouldn't always believe them. It's all about getting ready.

List of 5 best low float stocks to watch out for in 2022

These below-mentioned stocks had a run-up in 2022 and have a low float. Check out these so you can see what could happen and get ready.

1. EKSO Bionics Holdings, Inc. (NASDAQ: EKSO)

On June 25, Ekso Bionics Holdings, Inc. (NASDAQ: EKSO) said that the FDA had permitted it to sell its robotic exoskeleton device to people with a traumatic brain injury (ABI).

There are just fewer than 5 million shares of the stock in circulation. Before the market opened, the stock was worth $3, but by the end of the day, it was worth $10. There were 123 million of them.

Watch how quickly these low-float stocks move when news comes out. Well, this is especially when it gets loud.

2. Immuron Limited (NASDAQ: IMRN)

On June 9, Immuron Limited's stock went up because its research partner had asked the FDA to meet to discuss a new drug to treat infections.

This stock has less than 2 million shares out in the market. The shorts came out when the high for the day was moving into the afternoon.

3. Carver Bancorp, Inc. (NASDAQ: CARV)

Around June, when the Black Lives Matter protests were at their worst, a few stocks started going up because the companies did business with Black Americans.

On June 17, one of these stocks was CARV. It trades 59 million shares daily but only has 1.35 million floats.

4. City One, Inc. (NASDAQ: UONE)

Urban One, Inc. was another stock that was trading at the time. With 21.48 million shares, this has a giant float. On June 16, 45 million shares changed hands every day.

In one day, the stock price went from $4 to $40. In the days that followed, you will find there were some more chances to trade because the volume had gone up.

The rises in CARV and UONE are also good examples of sector momentum and how events in other parts of the world can affect the market.

5. ARCA Biopharma, Inc. (ABIO)

There are only 1.18 million shares of ARCA Biopharma out in the market. On May 28, the company even said it was working on a possible treatment for the coronavirus.

That day, 83 million shares changed hands, and the price went from $7 to $20. It didn't work the next day. But this shows how news can bring in a lot of money and make low-float stocks go up.

What are the pros and cons of trading low-float stocks?

Pros

Advantages of low-float stocks for investors:

• Because low float stocks are very volatile, there are a lot of chances to make significant short-term gains;

• Even though this isn't always the case, low float stocks tend to have low floats because insiders have bought many available shares. High levels of insider ownership show that the company's leaders have a lot of faith that the business is going in an accurate direction.

• There aren't many shares of low-float stocks available. So, even the slightest bit of news can cause an increase in demand, which can cause the stock price to rise even more.

Cons

Cons for investors of low-float stocks:

• High levels of volatility can also be a significant problem. It can be a way to make huge profits, but it can also be a way to lose a lot of money. A definite no-go for a risk-averse investor;

• Companies with low float tend to be less well-known. Even though this business may be the next Apple, most of the time, there are more questions than answers, which means you need to do more research before making a decision.

• Low-float stocks in high demand can sometimes go through the roof. But it's more likely that these lesser-known stocks won't have much demand. Thus, selling the stocks you buy would make it much harder.

Related questions: FAQs

1. What does it mean when a stock has a low float?

After a company's shares have been given to insiders, family, management, and other important people, the public can buy low-float stocks.

2. How do you find stocks with low float?

One way to find low-float stocks is to look at the total number of shares the public can buy. You can find this number by taking a company's total number of shares and subtracting the number of shares owned by company insiders. The number you're left with is the float.

But if you don't have this information or want to look for other low-float stocks, many stock screening tools can give you the float information.

3. What are the pros of investing in stocks with low float?

When a specific industry, sector, or company is in high demand, day traders can make much money with low-float stocks.

Bottom line

Regarding stocks, "low float" means that there aren't many shares left to trade on the public market after the correct number of shares have been given to the company's founders, officers, and other "inside investors."

Investors need to know how much low-floating stock a company has because it can show how liquid the stock is. 

It takes a lot of vast skill to weave in and out of trades and make quick and correct decisions. As a result, low-float stocks are primarily suitable for day traders who know what they are doing.