Syndicate
Small Float Theory
One final and much less scientific method we use to find potential investments is the "small float" theory. By small float, we are discussing about a stock with total tradable shares of ten million or less. The smaller the float the better. Tiny floats lead to extreme volatility and the potential for gigantic gains. One predicament with small floats is that they are usually associated with stocks that have minimal trading volume. We know that we previously said that a stock without volume is a dead stock. In the case of a tiny float, however, we will make an exception to this rule. Many seasoned microcap investors love to find stocks with small floats just like we do. When somebody discovers one of these stocks, word of the find sooner or later trickles to the online stock message boards. There are usually a number of investors who may take a position in the stock with this exposure. A spike in demand for a stock with a tight float leads to rapid price ascension when this happens.
An illustration of the small float effect was noted with a pink sheet stock called Legend Investment Corporation (Pink Sheets: LVCP). At one time, LVCP was hovering around 60 cents and had minimal trading volume. In less than one year, LVCP reached highs eclipsing $8! This astonishingly fast and robust appreciation in value was accomplished on trading volume averaging approximately 350,000 shares. You probably ask "How was this possible?” LVCP had a mere 4.68 million shares outstanding and a float of only 364 thousand shares. This is obviously no small float! When you consider that this stock was quoted by the Pink Sheets, a float that small is unheard of. Previous to its amazing run, LVCP reeled off a number of positive press releases. These press releases in themselves should have been enough to kick this stock into high gear. The spark for LVCP's explosive movement, nevertheless, was the identification of the stock as one with a insignificant float. Just before its run, reports of LVCP began popping up on a variety of stock message boards and websites. LVCP was identified as having an extremely small float and the potential for fast gains. A small float is like an ultraviolet light to an insect for many microcap investors... it is irresistible! Previous to the identification of LVCP as a stock with a small float, its average daily trading volume ranged from 10,000 to 20,000 shares. On a few days, LVCP had no volume whatsoever! After its identification as a small floater, LVCP had instantaneously had a volume spike approaching 50,000 shares. While this volume is fairly infinitesimal, the fact that LVCP had a tiny tradable float caused the stock to have an intraday spike of nearly 30%. As LVCP started to issue its positive press releases, the volume of the LVCP improved even more to a daily average of nearly 300,000 shares. For many penny stocks, 300,000 shares could constitute a single transaction, but for LVCP and its tiny float, it provided the impetus for inconceivable gains. With just a few weeks of "heavy" trading volume, LVCP appreciated nearly 2000%! If you didn't understand our fascination of stocks with small floats, you should understand now.