Low float / Low liquid stocks

What does low float mean?
Share float is nothing but the total number of shares of a company that are available for trading. Low float means, very less number of shares of a company is only available for trading. These companies have large promoter shareholding but less number of shares available for trading. If share float is less than 20% of the total outstanding shares, then the company can be considered as a low float company.
Eg: During the year 2014, caplin point lab was a low float stock.

How does the share float increase / decrease over time?
Share float of a company can increase / decrease due to corporate actions. For example a share split can increase the floating shares whereas as a reverse split can decrease the share float. Same way when a company announces buyback the share float obviously decreases.

Is it safe to invest in low float shares?
Many investors are comfortable to invest in ‘A’ group stocks and have a misconception that low float stocks are not safe investment options.
To reap maximum profits an investor should invest in fundamentally strong companies with low float at an early stage. Because the availability of stocks is low, any positive news can trigger upward movement in the share price.

Cons:

  1. Low float companies are main candidates for delisting.
  2. Since the liquidity is low there is a wider gap between the bid and ask price.
  3. Lack of trading activity makes it difficult for the traders to exit their positions.
  4. Stock price corrects aggressively based on news

Conclusion:
While choosing a company for investment purpose, low float should not be a hindrance but a bonus for the smart investor. Since low float stocks are like double edged sword, an investor should not allocate more than 10% of his total portfolio.