Question

What does it mean to ‘float’ a company? What is the purpose to float a company?

You should show your understanding in your own words, rather than simply coping or quoting directly from the book or other sources.

Answer 1

Lets understand the meaning of the the Float

Float- The term "float" refers to the regular shares ( Equity or preference) , a company has issued to the public that are available for investors to trade.

Calculation of Float = Outstanding shares of the Company - any restricted stock

Meaning of restricted shares- 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).

Example

A Company has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of the Company 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 million (10 million - 3 million = 7 million). In other words, only 7 million shares are available for trade.

Now let us understand the need to float a Company

• IMPROVEMENT IN DEBT EQUITY RATIO- Going public generally improves a company’s debt to equity ratio and may enable it to borrow from more conventional sources (ie, banks) on better terms in the future.
• INCREMENT IN PRESS COVERAGE- Press coverage of public companies is typically greater than that for private companies. This leads to increased public visibility.