0

In the article Investopedia explains 'Floating Stock', it states:

The more shares of floating stock are available, the less volatile a company's stock price is likely to be, and vice versa

I understand that when more shares are traded in the open market, there is less chance of insider trading and manipulation. But two big investment firms can have major holdings in the floating shares and they can cause volatility by trading the stock between themselves and manipulating the price all the time. Is it not true?

  • While it may be possible, I'd question the logic of which big investment firms would be prepared to take a big loss if the manipulations backfire. – JB King May 14 '13 at 16:25
3

More shares mean less volatility because it takes a larger number of trades, a larger number of shares per trade, or a combination of both to raise or lower the stock price.

Institutional investors (mutual funds, pensions, hedge funds, other investment firms, etc) are the sorts of organizations with the large amounts of money needed to move a stock price one way or the other. But the more floating shares there are in a company, the harder it is for one or two firms to move a stock price. A company with fewer floating shares wouldn't require as many trades (or as many shares per trade) to see wider swings in price.

When it comes to stock price, insider trading isn't the same as manipulation. In the (surprisingly few) cases of insider trading that are prosecuted, it tends to be an individual (or small group) with early access to information that the broader market doesn't have being able to buy or sell ahead of the broader market. Their individual sales are seldom if ever enough to noticeably move a stock price. They're locking in profit or limiting a loss. Manipulation might (but doesn't always) precede insider trading, if misinformation (or truth) is released for the purpose of creating a situation that can be profited from via a trade or trades.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .