by Jeff Reeves | February 14, 2012 1:29 pm
Slicing and dicing stock market data can be a daunting task. It’s not just figuring out the math of investments and the markets, but also the terminology. Sometimes you might even feel like Wall Street is a foreign country with its own quirky language.
Recently, a reader named Andrew asked about some of the specific terms around share volume and trading information. Specifically, he wanted to know the difference between daily volume, shares outstanding and “float.”
Here’s the easiest way I can describe it:
These metrics are all related, so they can be confusing. But here are some practical examples that may help explain the terminology.
In regards to total shares outstanding vs. float: Think about recent IPOs like LinkedIn (NYSE:LNKD) where everyone becomes a paper millionaire when the company goes public — but they obviously can’t dump their shares on the first day of trading. Right now insider ownership in the company is around 40%, in largely restricted shares. The result? The company has roughly 98.5 million shares in total, but a float of just 43.5 million. That’s because a large portion of the folks awarded stock in the IPO cannot legally trade their LNKD shares yet.
A less palatable way to view it is to think about a CEO who is awarded stock he has to hold for a set period of time as part of his compensation. Take Goldman Sachs (NYSE:GS), which gave its CEO Lloyd Blankfein $7 million in restricted Goldman stock last year. He can’t dump it immediately, but you can bet he’ll make a pretty penny when he does sell.
As for daily volume: Consider Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) owned 200 million shares of Coca-Cola (NYSE:KO). Those are indeed real shares of the company and they are part of the “float” … but Buffett is hardly a day trader and would never consider dumping 200 million shares in one fell swoop. So as a result, Coke’s daily volume is around 7 million shares bought and sold every day, despite the fact that there are a massive number of shares outstanding. A lot of folks, like Buffett, buy Coca-Cola and then don’t sell for a long time.
Contrast that with Bank of America (NYSE:BAC) which traded as many as 500 million shares in one day this last January, and averages more than 300 million daily! There is a float of about 10.5 billion shares for BAC, so that means theoretically every share of Bank of America will find a new owner in about 30 to 35 trading days. Sure, there might be a few buy-and-hold investors … but not many.
Hopefully these examples make sense, not just in explaining these metrics but also in explaining what they mean for an individual stock.
If not … email me at firstname.lastname@example.org and I’ll try to explain it again!
Jeff Reeves is the editor of InvestorPlace.com. Write him at email@example.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
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