Low Float Stock
This terms means stock traded in market are very low means supply is small and not volatile as market because of major part of stock dancing in hand of promoter, FII, DII and Value Investors and very small part of retail investors.
Market Cap= No of shares * Current Market price
Free Float = No. of Shares * Retail% * Current Market Price
But, we can’t always go by this to find stock.
Low float stock = are those stock where any thing positive or negative appear people become irrational of rational depending on the event (more money lie in hand of public who have very small capital invested).
When people become irrationals this defy principle of valuations.
But, when a free flow stock becomes a high float stock for this kind of stock which lie in hand of every person you know means everyone know about the stock and their is no information assymetry left in because money can’t be made if everyone know about it.
MEANS WHENEVER BIG BULL SELL THE STOCK THEY WOULD ONLY SELL AT HIGH BUY AT LOW.
For example: ITC, Yes Bank are example of HIGH free float stock.
Means large no. of shareholders buy and sell,
Many people do decision making,
when mass of people take decision is predictable because not everyone has emotional balance when taking financial decisions.
either the decision would be irrational or rational, when they sitting on stock for long since it the was child, and there is bad news about it but still hold with decision to sit with it is kind of mentality which tells this stock would recover to previous high without any kind of fact check by concall and financial, technical analysis.
I bought wipro at 298 and bought the wipro again at 625 it is irrational decision without verifying or backing of any data purely based on price with a thought it would rise again.
(MEANS MY RATIONALITY AND DECISION MAKING DISTRUCTED BY THE INCREASING PRICE AND GREED OF MINE.)
when it falled i started averaging and failed to access at what price would be best to buy and fear during averaging but still did to limit the losses is an irrational behaviour.
again bought at 370, ~400 someting to limit the losses.
This is story of every retail who sit in market without at knowledge of market. This is how retail investor react.
Either fear or greed.
Low free float stock = means supply of stock depend on those person who have invested 20 - 25 crore or more to create wealth they don’t take decision based on emotions.
So, in this case where supply sitting in hand of big bulls, Valuation principle got crushed for them the concept matter rather than numbers.
Valuation only matters in High float stocks.
Everything happens in the market happens based on the principle of perception.
and in low free flow stock not impacted by the valuation because those people who sitting with holding with a prospect, news perception which is not dictated by the valuation because they are themselves the market.
Because Market belongs to seller they decided the price of goods and low free float stock supply is restricted.
The price of low free float stocks are easy to manage by promoters and they are able to eat impact of fii selling without any negative impact in market with respect to either FII and DII selling small holding or FII has majourity shareholding.
Price to market or we can say it relative valuation.
to see if the stock is overvalued or undervalued.
Relative PE =Asian paints PE/ Nifty 50 PE
means people are ready to pay 2.68 Times more for the asian paints.
Free float is low because large part in hand of promoters + high demand because of limited supply FII and DII also holding + Good fundamentals of stock = If demands are not fulfilled it would cause rise in price of stock.
Valuation depends on cash flow, growth, risk.
Free float is only telling that liquidity, supply and demand.
So, free float doesn’t change intrinsic value or valuation but it impact the market price of stock.
In low free float stocks, the price may dance high in the sky not because of value but because of limited supply.
This defy the valuation in short term and because price can be manipulated by the promoters.
In low flow stock price makes the narrative.
So, in short free float + good fundamentals of company + with FII and DII holding kills the valuation because the price is backed by the potential or future earning.
Market in short say he deserve more as you can see in case of asian paints compard to Nifty 50.