What exactly is a company's float?
The term "float" refers to the regular shares that a company has issued to the public that are available for investors to transact. This figure is derived by taking a company's outstanding shares and subtracting from it any restricted stock. (Restricted stock is stock that is under some sort of sales restriction: for example, stock that is held by insiders and cannot be traded because they are in a lock-up period following an initial public offering.)
A company's float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. The company is not responsible for how shares within the float are traded by the public - this is a function of the secondary market. Therefore, shares that are purchased, sold or even shorted by investors do not affect the float because these actions do not represent a change in the number of shares available for trade: they simply represent a redistribution of shares. Similarly, the creation and trading of options on a stock do not affect the float.
Still don't quite understand what a float is? Here's an example:
Say the SUNW Sun Micro Systems has 10,000,000 shares in total, but 3,000,000 shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of SUNW are not allowed to trade these stocks for a certain period of time, they are considered to be restricted. Therefore, the company's float would be 7,000,000 (10,000,000 – 3,000,000 = 7,000,000). In other words, only 7,000,000 shares are available for trade by Joe and Jane America (or Canada, or China, or England, and so on).
It should also be noted that there is an inverse correlation between the size of a company's float and the volatility of the stock's price. This makes sense when you think about it: the greater the number of shares available for trade, the less volatility the stock will display because the harder it is for a smaller number of shares to move the price.