Net Float
Net float refers to the difference between checks in the process of clearing and checks that have already cleared in banking. Essentially, it’s the discrepancy between the amount of money the bank shows in its records and the amount that is actually available or ‘cleared’ in the bank.
In the context of securities and trading, net float refers to the number of a company’s shares that are available for public trading. It’s calculated as:
Net Float = Total Outstanding Shares – Restricted Shares
Total Outstanding shares are all the shares issued by a company. Restricted Shares are those that are held by insiders and cannot be traded because they are subject to restrictions.
The net float is important because it indicates the supply of shares in the market. A lower net float can often lead to higher volatility in a company’s stock price because a relatively small volume of trades can have a significant impact on the price.
Example of Net Float
An example in both the banking and securities contexts:
- Banking: Let’s say a business writes a check for $1,000 and the recipient deposits it. However, due to the clearing process, the $1,000 does not immediately leave the business’s account. For a short period of time, the business may show a balance of $1,000 (assuming the account was at zero before the check was written), but the recipient’s account also shows a balance of $1,000. This creates a net float of $1,000. The float will be resolved once the check clears and the funds officially move from the business’s account to the recipient’s account.
- Securities: Consider a company that has 10 million outstanding shares of stock. Out of these, 2 million shares are held by company insiders and are restricted from being traded. The net float of the company’s shares would be:
Net Float = Total Outstanding Shares – Restricted Shares
= 10 million shares – 2 million shares
= 8 million shares
So, there are 8 million shares of the company’s stock available for public trading. This is the supply of shares in the market, and it is this supply that would meet the demand from buyers in the stock market. The dynamics between the net float (supply) and investor demand play a major role in determining the company’s stock price.
