Shares are a popular form of investment, but how are they actually distributed? The term "free float" plays a decisive role here. In this article, we will discuss the free float in Shares and analyze its definition, meaning and effects.
What is free float?
The free float refers to the portion of a stock corporation's share capital that is not held by a single major shareholder or the company's management. These are shares held by small shareholders, institutional investors and other investors who do not have a controlling interest in the company. In other words, the free float is the sum of all freely tradable shares in a company.
The importance of the free float in shares:
The free float plays an important role for both the company and its shareholders. For the company, a high free float means a broader distribution of the shareholder base, which can reduce the risk of hostile takeovers. In addition, a larger free float can create greater liquidity and an active trading environment for the share. For shareholders, the free float offers more opportunities to trade their shares and can potentially lead to greater transparency and equal treatment.
Definition: Hostile takeover
A hostile takeover occurs when a person or other organization attempts to gain control of a company against the will of the management or board of directors. The aim of a hostile takeover is to acquire the majority of shares in a company in order to take over decision-making and controlling power.
Hostile takeovers can be carried out in various ways. A common method is for the acquiring party to make an attractive offer to the shareholders of the target company to acquire their shares. This can be done by buying shares on the open market or through a public tender offer. If the acquiring party acquires enough shares, it can gain control of the target company, replace management or make strategic decisions.
These factors influence the free float
There are various factors that can influence the free float. On the one hand, companies can carry out share placements or issues to enable new investors to acquire shares and thus increase the free float. On the other hand, companies can carry out share buybacks to reduce the free float and support share prices. In addition, major shareholders and institutional investors have an influence on the free float that should not be underestimated, as their decisions can affect the market share of freely tradable shares.
Effects of the free float on company performance
Studies have shown that there can be a correlation between free float and company performance. A high free float can lead to companies being managed more efficiently as they are less dependent on individual major shareholders and have a broader investor base.
In addition, a higher free float can increase share liquidity and attract the interest of investors. However, companies with a low free float can benefit from greater control by major shareholders and make quick strategic decisions. Depending on the situation, there are therefore advantages and disadvantages to a high or low free float ratio.
What role does the free float play in corporate governance?
The free float can have a significant influence on a company's decision-making. In contrast to companies with dominant major shareholders, companies with a high free float must take into account the interests of a broad shareholder base and ensure effective communication and interaction with their shareholders.
An important question in relation to free float is how decision-making is influenced. In companies with a high free float, it can be more difficult to achieve a uniform direction, as different shareholders may have different objectives and priorities. Management must therefore implement mechanisms to take account of the different interests and encourage dialog with shareholders.
One such mechanism is the Annual General Meeting, at which shareholders can cast their votes and exercise their rights. Here, free float shareholders have the opportunity to voice their concerns, ask questions and influence management decisions. They also have the right to information transparency in order to make informed decisions.
Another aspect to be considered in the role of free float in corporate governance relates to the composition of the Supervisory Board. The supervisory board has the task of monitoring the management and protecting the interests of all shareholders. In companies with a high free float, the supervisory board should reflect a balanced representation of the different shareholder groups to ensure that the interests of all shareholders are adequately taken into account.
Free float in practice
There are many examples of companies with different levels of free float. A well-known example of a high free float is Deutsche Börse AG. In June 2023, this amounted to almost 97 %.
The company has a large proportion of freely tradable shares, which results in a broad investor base and a high trading volume. This makes the share attractive to different types of investors and offers good trading liquidity.
On the other hand, there are companies with a low free float in which a small group of major shareholders controls a significant proportion of the share capital.
For example, the Fielmann AG the free float is just over 27 %. With a low free float, there are fewer shares on the open market, which can lead to limited trading liquidity. This can make it more difficult to buy or sell larger share positions as supply is limited.
The impact of the free float on share price volatility
A high free float can lead to increased share price volatility. Volatility refers to the fluctuations in the share price over time. Higher volatility means that the share price fluctuates more, which can be associated with higher risks and uncertainties for investors.
There are several reasons why a high free float can lead to higher volatility. Firstly, a larger number of shareholders can lead to different opinions and trading decisions. If shareholders with different objectives and strategies buy and sell their shares, this can lead to increased transactions and therefore increased volatility.
Secondly, a high free float can influence the liquidity of the market. If there are many freely tradable shares, this can lead to more active trading. Increased trading volume can in turn increase volatility, as buy and sell orders can influence the share price.
In addition, news and information can have a stronger influence on the share price when the free float is high. As a larger number of shareholders are involved, different interpretations of news can lead to different trading decisions. This can lead to rapid and sharp price movements, which increase volatility.
However, there are also factors that can influence the stability of the share price despite a high free float. Strong corporate governance, a solid business strategy and stable earnings forecasts can boost investor confidence and help to make the share price less volatile. Clear communication from the company about its goals, progress and risks can also help to reduce volatility.
External factors such as macroeconomic conditions, political uncertainties or general market trends can also influence volatility. These factors do not necessarily have a direct impact on the free float, but can nevertheless influence the share price and lead to increased volatility.
In summary, it can be said that a high free float can lead to increased share price volatility. A larger number of shareholders with differing opinions and trading decisions as well as an increased trading volume can lead to strong price fluctuations.
However, solid corporate governance, clear communication and a stable business outlook can help to reduce volatility. It is important to consider these factors when evaluating stocks and assessing risk.
Conclusion: Free float in shares: definition, significance and effects
The free float of shares plays a crucial role for companies and shareholders. It enables a broad distribution of share capital and creates potential for greater liquidity and trading opportunities.
A high free float can protect the company from hostile takeovers and contribute to more efficient corporate governance. However, there are also advantages to a low free float, such as faster decision-making. The free float structure varies from company to company and has an impact on company performance and shareholder structure.
It is important to consider the free float when evaluating stocks and companies. Investors should analyze the free float ratio to gain a better understanding of liquidity, trading volume and the potential for price movements. In turn, companies should carefully consider the impact of the free float on their governance and capital structure.
