In investment circles, a free float is the amount of shares of stock held by investors that are considered open to the possibility of trading those shares, assuming certain circumstances take place. This figure normally represents the number of shares that are more likely to be offered for sale should specific events happen in the marketplace, such as a sudden upturn or downturn in the cost per share, or sudden changes in the leadership or ownership of the issuing company. The free float does not account for shares that are held by what are known as strategic investors, or those investors who are likely to retain possession of their shares in spite of the occurrence of specific events.
Strategic investors who hold shares not considered as part of the free float include owners, directors, and employees of the issuing company that are provided with shares as part of their benefit packages. The term is sometimes stretched to include investors who have pledged long-term support to the business and are highly unlikely to dump their shares on the open market, except under the most dire of circumstances. Typically, a company wants to maintain an equitable balance between strategic investors and free float investors, since those strategic investors can be extremely important if the company is faced with the task of fending off a takeover attempt.
While a free float is important to companies of just about any size, smaller businesses are particularly interested in the establishment of a balance between strategic ownership of shares and the amount of free float. The goal is to have enough shareholders that are likely to stand by the company even in adverse times, while at the same time enjoying the possibility of attracting additional investors who may want to obtain shares and hold onto them over the long-term. With this approach, the company will find it easier to respond to changing circumstances within the marketplace, usually by projecting the impact of those events on the buying and selling of its shares among investors, and make plans to capitalize or benefit from those actions.
A company with a significant amount of free float is often a good target for corporate raiders. Depending on the laws that apply in the nation in which the company is established, the raider may be able to acquire a significant number of shares before the trend is noticed. Unless there is a solid block of strategic investors to form the basis for a counter move against the raider, there is a good chance the company owners will eventually be forced to sell, possibly at a loss. For this reason, assessing the current amount of free float on a regular basis is crucial to the process of managing a business and retaining control of that business.
