The stock market has been buzzing with news recently over the privatization attempt of CK Tangs by the Tang Family and this counter happens to have a low free float or public float. Basically, the free float of a counter is the number of shares that are held by the public and not by any institutional investors or any majority shareholders. So what is the danger in buying stocks with a low free float ?
1. Low Liquidity
Stocks with a low free float tend to have a low liquidity. As such, you may have a problem selling your shares on the the stock exchange. Furthermore, you may be not able to get a good price since the spread, which is the difference between the buying and selling price, for counters with a low free float is likely to be significant.
2. Privatization Attempt
Any counters with a low free float that has a majority shareholder in it, runs the risk of being taken private by the shareholder. Typically, this will happens when the stock market is depressed, making any privatization attempt to be much less expensive since the share price is likely to be low when the stock market is depressed. As such, the shareholder is not likely to offer a high price to buy over the shares that are held by the public. If you are an investor who had bought such a stock at a higher price and is waiting for the stock to recover after the stock price is being depressed by the stock market, you may be forced to take a realized loss during such a privatization attempt since the offer price in the privatization attempt may be lower than your buying price.
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Theirs always risk when investing in stocks.
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