Legal Definitions - float

In legal and financial contexts, the term float can refer to several distinct concepts, both as a noun and a verb.

As a Noun:

1. Temporary Funds Due to Processing Delays

Float refers to the amount of money that appears to be in an account but is not yet fully settled or available, typically due to the time it takes for transactions (like checks or electronic transfers) to clear between financial institutions. It represents a temporary, artificial balance created by the delay in processing debits and credits.

• Example 1: Sarah writes a check for $500 to pay her rent on Monday. Her landlord deposits it on Tuesday, but it takes two business days for the check to clear Sarah's bank. During those two days, the $500 is considered float in Sarah's account because it still shows as part of her balance, even though it's committed to the landlord and will soon be withdrawn.

  Explanation: The $500 is the float because it's an outstanding amount that hasn't yet been debited from Sarah's account, creating a temporary higher balance than what is truly available.

• Example 2: A small business receives a large payment from a client via an electronic funds transfer (EFT). The payment is initiated on Friday, but the funds won't be fully available in the business's bank account until Monday morning. Over the weekend, that incoming amount is considered float.

  Explanation: The money is in transit and not yet settled in the business's account, illustrating the concept of float as funds temporarily held up in the banking system.

2. Publicly Traded Shares

In the stock market, float refers to the number of shares of a company's stock that are actively available for trading by the general public. This excludes shares held by insiders, employees, or restricted shares that cannot be immediately sold.

• Example 1: Tech Innovations Inc. has 100 million shares outstanding. However, 30 million shares are owned by the founders and key executives, and another 10 million are restricted employee stock options. The remaining 60 million shares constitute the company's float.

  Explanation: The 60 million shares are the float because they are the portion of the company's stock that can be freely bought and sold by investors on the open market.

• Example 2: After a major institutional investor sells off a large block of shares in a pharmaceutical company, the company's float significantly increases, making more shares available for trading by other investors.

  Explanation: The sale by the institutional investor adds more shares to the pool accessible to the public, thereby increasing the float.

As a Verb:

1. To Allow Currency Value to Fluctuate

When a currency is said to float, it means its value is determined by the forces of supply and demand in the international exchange markets, rather than being fixed or pegged by a government or central bank.

• Example 1: Historically, some countries pegged their currency to the U.S. dollar. If a country decides to allow its currency to float, its exchange rate against other currencies will then fluctuate daily based on economic news, trade balances, and investor sentiment.

  Explanation: The act of allowing the currency's value to be set by market forces, rather than a fixed rate, means the currency is now allowed to float.

• Example 2: Following a period of economic instability, a nation's central bank announced it would no longer intervene to maintain a specific exchange rate for its currency, effectively letting it float freely on the global market.

  Explanation: By ceasing intervention and allowing market dynamics to dictate the value, the central bank permitted its currency to float.

2. To Issue Securities for Sale

To float a security means to offer or issue new stocks, bonds, or other financial instruments for sale to investors in the market, typically to raise capital for a company or government.

• Example 1: To fund its ambitious expansion plans, a renewable energy company decided to float a new series of corporate bonds, offering them to institutional and individual investors.

  Explanation: The company is making new bonds available for purchase by the public, which is an act of floating securities.

• Example 2: The government announced its intention to float new treasury bills next quarter to help finance public infrastructure projects.

  Explanation: The government is issuing new financial instruments (treasury bills) for sale to raise money, thus floating them on the market.

3. To Arrange or Negotiate a Loan

To float a loan means to arrange, secure, or negotiate a financing agreement, typically with a bank or other lending institution.

• Example 1: A startup entrepreneur worked with several banks to successfully float a business loan to cover initial operating costs and equipment purchases.

  Explanation: The entrepreneur secured and arranged the loan, which means they floated it.

• Example 2: Despite challenging market conditions, the real estate developer managed to float a construction loan for their new apartment complex project.

  Explanation: The developer successfully negotiated and obtained the necessary financing, thereby floating the loan.