Every morning that the market is open I share a morning watchlist on social media with info such as news headlines, support levels, resistance levels, and number of outstanding shares for stocks that are making big moves. I get asked pretty frequently why I include the number of outstanding shares and how it is relevant for day trading stocks. I wanted to make this post to explain the importance of it and share how I use it in my own trading. Hopefully after reading this you'll see why I share this data on my watchlists and you'll check for this number before each of your trades because it can be very beneficial and is a simple way to help manage your risk in the market.
Let's start with the obvious question you may have... what are outstanding shares?
The number of outstanding shares is simply the total number of shares a publicly traded company has. This includes the shares that you and I can trade as retail traders, the shares that are traded and held by institutions/hedge funds/banks, and even the shares that are owned by company insiders. Anyone can very easily look up the number of outstanding shares a company has. You can do this in your trading platform, on websites like yahoo finance or finviz, or you can look into the company's most recent earnings report and see the number directly from their SEC filings. The screenshot below shows where the number of outstanding shares is located for $AAPL in the thinkorswim mobile platform on the right shows the same number located on the first page of $AAPL's most recent earnings report filing. You'll find this info in the same location for any spot, $AAPL was just use for this example.
Outstanding shares differs slightly from a stock's float, but the way that they affect the stock can go hand in hand. A stock's float is the number of shares available to be traded by the public, like you and I. You can find a stock's float by subtracting the total number of closely held shares (by company insiders, employees, etc.) from the total number of outstanding shares. Although traders seem to talk more about a stock's float than the number of outstanding shares, I personally like to focus more on the outstanding shares because it can be difficult to find accurate float data in a limited amount of time.
The reason for that is because a company does not directly state their float data in their SEC filings like they do their outstanding shares. This means that in order to get accurate float data, you have to research and find the number of closely held shares by digging through filings and then subtract that number from the total number of outstanding shares. You can look for a stock's float on 3 different websites like yahoo finance, finviz, and marketwatch and many times you'll end up with 3 completely different numbers.
The number of outstanding shares may be more commonly used for calculating a company's market capitalization, but it's definitely a valuable number for short-term trading as well. This number can be thought of as the supply, and the volume for the stock can be thought of as the demand. When there is a low supply (in this case meaning a low float or low amount of shares outstanding) and high demand, generally there will be a larger amount of volatility in that stock compared to one with a larger supply.
For example, you can look at the number of shares outstanding for stocks with the largest % gain on any given day, and you will find that a large majority of them have less than 100 million shares outstanding. Now, 100 million isn't a magical number for picking big runners, but stock's with many more shares outstanding than that tend to have less volatility and less potential for huge runs in my experience. In fact, if you look back on the biggest supernovas from the past few years, you'll notice that they all had under 100 million shares outstanding, and many of them even having less than 10 million shares. In the screenshot below you can see the huge spike in the stock $DRYS from 2017 when it went from under $5 to over $100 in just a few days. Since then $DRYS has done many reverse splits and offerings, but at the time it had a very low float of only around 1 million shares.
As you can see, volatility doesn't just work on the upside though. $DRYS, like many big runners, came down just as quickly as it went up. That's why trading low floats with higher volatility can create a higher risk, higher reward situation. With that being said, one of the ways I use the number of outstanding shares is to give myself an idea of the stock's expected volatility. If it has a low supply, I most likely will trade a smaller-than-usual position size to reduce my risk in the trade that is expected to be highly volatile.
In my opinion, this is especially important with longer-term trades and investments. Generally the goal of an investment is to profit from a slow and steady rise over a long period of time. If you're investing in stocks with a low number of outstanding shares, you'll most likely have to deal with much more volatility and larger drawdowns in your positions. Aside from the dilution, poor financials, and frequent pump and dumps, this is one of the reasons that penny stocks do not make good investments, even though they can be great for short-term trading and scalping.
Hopefully this clears up why I include the number of outstanding shares on my morning watchlists and persuades you to check it out if you don't already! If you want to learn more trading tips and strategies for the market in general, get started as a Market Master using the button below!
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