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16 Jan 2021

Econ Digest

New investors must understand free float shares


         During this period, investors in the stock market have probably heard the term “low free float shares” almost every day, because it is one of the suspicious factors that have caused the stock market to fluctuate so much recently. However, for new investors to learn more, they must first take a step back and start by understanding the concept of “free float”. Free float refers to the number of shares held by minority shareholders, in other words, the number of shares available for trading by retail investors in the market. Therefore, the price of stocks with low free float (low liquidity) fluctuates more than price of stocks with high free float (high liquidity) when large shareholders or investors trade each time.

         According to the current rules, a listed company must have at least 150 minority shareholders whose total holdings are not less than 15% of the company’s paid-up capital, which means that the number of free float shares must exceed 15% of the paid-up capital. If a listed company’s free float ratio falls below such threshold in its first year, it will be notified by the Stock Exchange of Thailand (SET), but if it remains below the threshold in its second year, the SET will publicly announce the company’s name, and the company must pay an additional annual fee and must submit a progress report on free float correction every six months. In the past, the SET has never removed the status of a listed company when the number of minority shareholders does not meet the criteria.  

         Turning to the recent issue in the stock market, the actual trading volume or liquidity of some companies’ shares is relatively low (especially in the technology sector), although their free float ratios still meet the required criteria. This has led to large shareholders/investor movements affecting the price of stocks, and some hot stocks seem to have recently increased volatility across the stock market. As a result, the SET wants to rework the criteria used to monitor low free float shares in order to reduce the impact on investors and the market as a whole.

          At present, the SET will warn investors with various symbols at the end of each stock name. Stock under the regulatory measures will carry a T symbol indicating the presence of abnormally trading stock cash balances, graded by regulatory strictness, from T1, T2 and T3. The SET also signals that further warning may be given to investors regarding cash balance after the revision of regulatory measures for low free float shares. In addition to understanding fundamentals and technical factors, novice investors in the stock market need to keep track of various regulations that will be revised soon.

        Remark: The SET defines free float shares as equity held by minority shareholders, i.e. common shareholders who are not involved in management. Strategic shareholders mainly include the managing director or persons ranked among the top 4 executives, executives equivalent to the top 4 in management positions and related persons associated with these persons. Strategic shareholders also include shareholders holding more than 5% of paid-up capital and their associates (except the securities companies, insurance companies, mutual funds and contingent savings funds) and shareholders with whom the company has an agreement prohibiting the sale of shares within a specified of time.

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Econ Digest