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High float stocks are great in their own right, but they are not the be all and end all. Certainly, low-float stocks can also attract a large portion of investors. Here are some pros and cons to consider in low-float stocks:
Low-Float Advantages
As is the case with high float stocks, there are many benefits to investing in low float stocks. Some of the most important include:
- Momentum Opportunities . Due to the highly volatile nature of low-float stocks, it is common to see dramatic short-term runs in value on these stocks. So if you’re comfortable with higher levels of risk and looking for big short-term opportunities, low-float stocks are a great place to look.
- High levels of insider information ownership . Although this is not always the case, sometimes low float stocks have low float because insiders believe so much in the future of the company that they have bought a large percentage of the outstanding stock. When insiders have a high level of skin in the game, it’s a strong indication that the company is moving in the right direction.
- Any catalyst can trigger high demand . By nature, low-float stocks have a limited supply of available shares. As a result, any piece of news, even the smallest announcement, has the potential to trigger a spike in demand, leading to a dramatic increase in the stock price.
Low Float Cons
While there are plenty of reasons to consider low-float stocks for your portfolio, the grass isn’t always green on this side of the fence. There are a few drawbacks to consider before diving into the low buoyancy pool.
- Volatility is dangerous . High levels of volatility in low-float stocks can lead to dramatic gains. However, the losses have the potential to be just as significant. Therefore, low-float stocks are not suitable investment vehicles for the risk-averse investor.
- Lesser known companies . Low-float stocks tend to represent lesser-known companies. These companies are far from household names, and while they may have created an exciting new business, these businesses often present more questions than answers. When investing in low-float stocks, it’s important to do additional research to ensure you’re getting involved in a company with strong prospects for the future.
- Liquidity risk . Sometimes low-float stocks can be in high demand and the value of the stock will soar. On the other hand, these lesser-known stocks may not be in high demand, making them difficult to sell once you own them.
Who Should Consider High and Low Float Stocks?
Determining whether you should invest in low-float, high-float, or mid-float stocks is a simple process. Keep the following in mind when making your decision.
What is your appetite for risk?
When investing, it is important to know your appetite for risk. Investing isn’t supposed to be scary and it shouldn’t make you uncomfortable. If you do, you are venturing far beyond your comfort level in terms of risk, leading to emotionally driven and losing decisions.
Determine your risk appetite. If you think you have a high risk appetite, investing larger percentages of your portfolio in low-float stocks is the way to go. If you have a moderate or low risk appetite, you will want to invest in medium to high float stocks.
Looking for a boost or steady growth?
High float stocks are best known for the steady movement seen in their price. This stability helps reduce risk and produce long-term profit.
In contrast, low float stocks are known for their high momentum moves in the market. This increases risk, but also increases the potential for strong short-term returns.
So if you are looking to invest in stocks that will grow over time, high float stocks are best for you. However, if you want an investment that has the potential to create strong short-term gains, low-float stocks are where you should be.
Think of a mix between the two
A properly balanced portfolio does not focus on a single stock, stock type or sector. Instead, a well-diversified portfolio should be considered to maximize potential earnings while mitigating risk.
As a result, it is best to consider mixing high and low float stocks. If you’re looking for a low-risk portfolio, consider investing about 5% of your investment dollars in higher-risk, low-float stocks in an attempt to increase your returns while keeping risk at bay.
On the other hand, if you’re looking for a high-risk portfolio that has the potential for huge returns, consider investing 65% of your stock allocation in your portfolio in low-float stocks to take advantage of the momentum they offer.
The other 35% of your stock allocation should be invested in high-float stocks to add some stability and protect you from risk.
Last conclusions
Floating stocks say a lot to investors. They are an indicator of potential risk, potential reward, and ownership structure, all of which are very important to investors.
Of course, the more you know about any investment you’re considering, the better your chances of generating the returns you’re looking for. Therefore, it is pertinent to pay attention to the float of any stock that interests you.
Always keep in mind that floating stocks have an inverse relationship to risk: high-float stocks generally have lower levels of risk, while low-float stocks have higher levels of risk. Keeping this fact in mind will further help you balance risk and reward within your investment portfolio.
