When considering buying stock from an initial public offering (IPO), investors shouldn't assume that a newly public company will float all its stock. When Robinhood (HOOD -2.01%) went public in 2021, for example, the company only floated about 7% of its shares.
Newly public companies often begin with a smaller float because the market may not be ready to absorb a large number of outstanding shares. Insiders may also not want to part with their shares during an IPO, or the company may simply want to generate more enthusiasm for a stock by limiting the supply.
Stock float and volatility
Stocks with a smaller float tend to be more volatile. A stock with a small float can become even more volatile during a short squeeze, when its price moves higher and short sellers need to cover their positions. As more short-sellers buy the stock to cover their positions, the stock price rises, meaning more short-sellers face losses if they don't buy the stock.
The relationship was highlighted in early 2021 during an epic short squeeze of GameStop (GME +0.04%) stock. The troubled company had been repurchasing modest amounts of its own stock for the past two years, reducing the float. But it also had been closing stores, and short-sellers were circling its stock; at one point, roughly 140% of its float had been sold short.
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