Flotation Cost

Finance a la shmoop what is float? well this floats and this sinks to the bottom [Shark eats another fish]

and well just doesn't move well float in a financial sense is kind of the same

thing sorta..... whatever dot-com goes public and sells 30% of itself to the public it

had 50 million shares before the IPO and then it sold 15 million shares so that

now there are 65 million outstanding right it just ran the Xerox machine [Shares printing from xerox machine]

printed 15 million shares and sold them well at this moment the shares trading

or the float are just 15 million that's the float that 15 million numbers the

shares trading well then gradually after six months or so insiders begin selling

their shares so that you know they can buy Porsches and diamond-studded tennis [Diamond studded tennis racket appears]

rackets and pay divorce settlements and all that stuff so twelve million from

that 50 million pool now go from being sunk or not moving at all to floating or

being in the normal trading pool which will have grown from yes 15 million to

now 27 million that 27 million shares is the float so why does float matter well

it's a direct reflection of the liquidity of the company well let's say

that on average a given company trades two percent of its shares you know the

ones that are floating so here two percent of 27 million is just a little

over half a million shares a day or 540 thousand shares a day that's actually a

really small amount let's say the stock was trading for 20 bucks it's only 10 [Magnifying glass inspects cash]

million dollars a day in total trade volume for a company that has a much

larger market cap that's tiny teeny teeny tiny so for larger mutual funds

which are tens of billions of dollars in size a tiny float makes it really hard

for them to get into the stock and more importantly get out of the stock when [People frantically moving in a stock market house]

they want to so those big funds generally just avoid stocks with tiny

floats and the cost to the company is that well there's less demanders or

buyers for it so its stock tends to trade at lower multiples and it's also a

problem in that the shareholders of the very large mutual funds have the [Businessmen shaking hands]

ear of very large companies who often are you know acquisitive so that the

tiny companies with small floats aren't whispered about by the fund managers to

the companies who might be thinking about buying whatever.com or you know

whatever so yeah that's the float and if you're a big pond you, you know want to

avoid the small fish [Small fish float to the top of a pond]