Sometimes stocks can skyrocket by 20 percent or more in a single day without any major news from the company. While it may seem illogical for such huge moves to come out of nowhere, many of these major short-term spikes are driven by the market dynamics associated with low float stocks.
There are two terms worth knowing here: outstanding shares, and float.
A company’s outstanding share count tells us the total number of shares of a stock that are in existence. However, for most companies, a large chunk of those shares are held by company insiders and other institutional investors that are restricted or have specific selling rules.
By taking the total number of shares outstanding and subtracting out shares held by insiders, employee stock ownership plans and other major investors, you can get an idea of just how many shares are available to trade freely on the public market. This number is referred to as a stock’s float, and it is a very important part of a stock’s liquidity and potential volatility.
Stocks with relatively small market caps and extremely small floats are highly susceptible to huge short-term spikes in share price. Often, these low-float spikes can be triggered by one large order or a handful of relatively large buy orders that may or may not come in response to an actual catalyst.
For example, with most liquid stocks, $100,000 of buying volume is easily digested by the market, and a buy order that size might move the stock by 1 percent or less, or not at all. However, low-float stocks tend to have relatively few shares available for purchase, meaning an order that size could push the stock higher by 5 percent or more.
Once a low-float stock gets moving, two additional dynamics fuel the move. First, the big initial move shows up on screeners across the market, and momentum traders tend to pile into the stocks with the most action.
When the stock really starts to move, the second dynamic comes into play. In most major stocks, large short-term moves on no news would be met by short selling volume as traders attempt to profit off of the inevitable pullback. But most low-float stocks have few or no shares available for short sellers to borrow, so the huge run-ups are free to happen unchecked until longs begin to sell.
In the past month alone, a number of low float stocks have made huge short-term moves. Check Cap (NASDAQ: CHEK) gained 230 percent over a five-day stretch. Genprex (NASDAQ: GNPX) gained 250 percent over a five-day period. Integrated Media Technology(NASDAQ: IMTE) gained an unbelievable 1,400 percent in a single day. None of these companies reported major news items related to the moves. All of them had extremely low floats.
Low float traders need to keep three things in mind. First, spikes in low-float stocks can be extremely volatile, meaning a 5 or 10 percent move may still actually be early in the move.
Second, these short-term spikes rarely last long, so holding these stocks once they start to fall is rarely a good idea.
Finally, it goes without saying that these stocks can be some of the most volatile and illiquid stocks in the market. In other words, a $20 stock could easily drop to $15 by the time you enter in your sell order. Trading low float stocks is not for the faint of heart, and a trade that gets away from you can get ugly fast.
Disclosure: the author holds no position in the stocks mentioned.
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