Float: Concept and Importance in the Saudi Stock Market

Float in the Saudi stock market refers to the percentage of shares available for free trading from the total shares of the listed company. This percentage represents shares that are not controlled by government entities, families, or major shareholders, but are owned and can be freely traded by investors in the market. The float ratio is calculated by dividing the number of free shares (the shares traded in the market without restrictions) by the total number of shares issued by the company, then multiplying the result by 100 to obtain the percentage. This indicator is a means to assess the liquidity of the stock, meaning the ease of buying and selling it without significantly affecting its price. The Saudi Capital Market Authority places great importance on this indicator, as it is directly linked to the initial listing requirements for companies in the market, where companies are required to offer minimum percentages of shares for public subscription to ensure a minimum float that enhances liquidity and transparency in the stock market.

To calculate the float ratio for any listed company in the Saudi stock market, a simple formula is used: Float Ratio = (Number of Free Shares ÷ Total Number of Shares) × 100%. Free shares are those that can be traded by individual investors and institutions in the market without restrictions or special conditions, excluding shares held by the government, large families, or strategic major shareholders. For example, if a company has 100 million shares, and 80 million of them are owned by major shareholders or the government, the number of free shares is 20 million. The float ratio in this case is: (20 ÷ 100) × 100% = 20%. A high float ratio indicates that the stock is more liquid and easier to trade, while a low ratio suggests that a major entity controls the company, which may lead to greater price volatility and difficulty in entering or exiting the investment.

Float is a key factor in determining the liquidity of a stock in the Saudi stock market. Liquidity refers to the ease of buying and selling a stock quickly without significantly affecting its price. The higher the float ratio, the greater the number of shares available for trading, making it easier for investors to execute buy and sell orders, even in large quantities, without a sharp impact on the price. In companies with low float, executing large trades may lead to sharp price movements due to limited supply. Therefore, many institutional investors or large capital owners prefer to enter stocks with high float to ensure the ability to enter and exit the stock easily without losses resulting from low liquidity. Additionally, stocks with high float are often less susceptible to sudden speculation and large fluctuations.

Float is directly related to the level of risks and volatility that a stock may be exposed to in the market. When the float ratio is low, it means that a small number of shares are available for trading, making the stock more susceptible to sharp fluctuations. Movements by a limited number of investors or large buy or sell orders can significantly affect the stock price. Conversely, a high float ratio limits these fluctuations, as supply and demand are distributed over a broader base of investors and shares. This balance reduces the risks associated with sudden volatility and increases the stock's attractiveness for long-term investment. Therefore, float is always viewed as one of the important indicators for assessing the risks associated with investing in any listed stock.

Free shares are those that can be traded in the market by all investors without any restrictions and are included in the calculation of the float ratio. On the other hand, held shares are those owned by major shareholders, such as the government, royal families, or strategic partners, and are often not available for public trading except under special circumstances or after specific lock-up periods. These held shares are excluded from the float calculation because they do not participate in the daily trading of the stock. A large percentage of held shares reduces the liquidity available in the market and increases the control of major owners over the company. Therefore, investors are interested in knowing the percentage of free shares when studying any stock, as it reflects the ease of trading in it and the independence of price movement from the decisions of major shareholders.

The Saudi Capital Market Authority sets clear standards to ensure a minimum float when listing companies in the market. Among these standards, companies wishing to list in the main market are required to offer at least 30% of their shares for public subscription, while in the parallel market (Nomu), the percentage must not be less than 20%. These requirements aim to enhance liquidity in the market and ensure a sufficient number of shares are available for free trading. The Authority also requires companies to periodically disclose their ownership structure and float ratio in their annual and quarterly reports. The Authority monitors companies' compliance with these standards through periodic reviews and regulatory updates, enhancing transparency and trust in the Saudi market and encouraging more local and international investors to participate.

Float ratios vary among companies listed in the Saudi stock market depending on their ownership structure and sector. For example, Al Rajhi Bank, as one of the largest Saudi banks, has a high float ratio ranging between 40-50%, making it one of the most liquid and attractive stocks for investors. In contrast, Saudi Aramco, despite its massive size, offered only about 1-2% of its shares for public subscription upon its listing, resulting in a low float ratio due to the Public Investment Fund retaining most of the shares. Infrastructure or government utility companies typically have lower float ratios, ranging from 10-20%, due to government control. Meanwhile, major telecommunications and energy companies often have float ratios between 30-50%, providing them with good liquidity and a strong position in the main market indices.

The Saudi stock market has witnessed a development in float ratios in recent years due to stricter regulatory requirements and an increase in new public offerings. Estimates indicate that the average float ratio for companies in the main market reached around 30-50% in 2024, with higher ratios in the financial and service sectors as they mature. This development is attributed to privatization policies stemming from Vision 2030, which have pushed for larger stakes of government companies to be offered for public subscription. Updates in the Capital Market Authority's regulations have also mandated new companies to offer higher percentages, increasing the inclusivity of the investor base and raising overall market liquidity. This trend is expected to continue with the expansion of the privatization program and the entry of new companies into the market.

The float ratio plays a pivotal role in determining a company's weight within financial indicators such as the general market index (TASI) or emerging market indices. The higher the float ratio, the greater the weight of the stock in the index, leading to increased institutional trading volume. Additionally, stocks with high float tend to achieve more stable performance and are less susceptible to sudden fluctuations. In contrast, stocks with low float may be more affected by individual events or movements by large investors, increasing their volatility. Therefore, global index companies, such as MSCI and FTSE, prioritize selecting stocks with high float when including the Saudi market in their indices, enhancing the flow of foreign liquidity into the market.

Investment strategies vary among investors based on the float ratio of the stock. Long-term investors and investment funds prefer stocks with high float, as they offer high liquidity and reduce the risks of sharp fluctuations. Conversely, some speculators may be attracted to stocks with low float, seeking opportunities for quick profits due to significant price movements that may occur from news or sudden trades. However, the low liquidity in these stocks poses greater risks when attempting to exit the investment or execute large trades. Therefore, it is always advisable to balance the float ratio with investment goals and the appropriate risk level for each investor.

Companies listed in the Saudi stock market can increase their float ratio in several ways, primarily by offering new shares for public subscription or by major shareholders selling part of their stakes in the market. This can also be achieved by converting part of the held shares into free shares through employee participation programs or distributing free shares. In some cases, companies resort to stock splits to make the stock price more attractive and increase the number of shares traded, thereby raising relative liquidity. These actions aim to expand the investor base, enhance liquidity, and attract more institutional investors and large portfolios, positively reflecting on the company's performance and market value.

Float in the Saudi stock market is influenced by several economic and political factors, most notably government policies related to privatization and public offerings, as well as the Capital Market Authority's trends regarding listing requirements. Additionally, fluctuations in global markets, foreign investment flows, and the level of stability of the national currency affect the volume of float and market liquidity. For instance, the stability of the Saudi riyal and its peg to the dollar enhances foreign investor confidence and encourages them to invest in the Saudi market. Moreover, the success of privatization programs and the increase in the listing of government companies contribute to significantly raising average float ratios, reflecting positively on the attractiveness of the Saudi market regionally and globally.

Although float refers to the free percentage of shares traded in the market, there is another concept known as currency float. In the context of the Saudi economy, the government has not resorted to floating the Saudi riyal but has maintained a fixed peg to the dollar. Currency stability indirectly affects the stock market by enhancing foreign investor confidence and ensuring a stable financial environment. Should a currency float occur, it could lead to fluctuations in exchange rates, impacting capital flows. However, so far, the Saudi government has focused on financial stability, supporting stock market performance and liquidity.

The years 2024-2025 have witnessed significant developments in the Saudi stock market, with the main market index rising noticeably, driven by the increase in prices of leading stocks with high float such as Saudi Aramco and the National Bank. Additionally, new government policies have led to the public offering of government and semi-government companies, increasing average float ratios in the market. Regulatory updates have enhanced market transparency and raised the minimum float required at listing, contributing to attracting more foreign and local liquidity. These developments are expected to continue with the expansion of privatization programs and the entry of new companies into the market as part of Vision 2030.