In finance, the term “float” can have several different meanings depending on the context:
- Banking Float: This refers to the amount of time it takes for money to move from one account to another. When a check is deposited, there may be a delay before the funds are available in the account. The money in this “float” period is in the banking system but not in the depositor’s account.
- Insurance Float: This term is often used in the insurance industry to refer to the amount of money an insurance company has from premiums paid by customers that has not yet been paid out in claims. This money can be invested by the insurance company for a profit. Warren Buffet, the CEO of Berkshire Hathaway, is famous for effectively using insurance float to fund investments.
- Stock Float: In the stock market, the float of a company refers to the number of shares that are available to the public for trading. This does not include shares held by insiders, the company itself, or other major stakeholders who hold shares that are not frequently traded.
- Float in Cash Management: In the context of cash management, float refers to the duplicate money present in the financial system during the period a deposited check is in the process of clearing.
So, depending on the context, the exact meaning of “float” can vary, but it generally refers to money that is temporarily available or in transit.
Example of Float
- Banking Float: Let’s say you deposit a check for $500 into your bank account. Your bank might make $200 available immediately, and the rest will be available after the check clears, which could take a few days. During that time, the $300 is considered banking float.
- Insurance Float: Consider an insurance company that receives $5 million in premiums from its customers in January. Over the course of the year, it expects to pay out $4.5 million in claims. The company can use the $5 million float to invest and generate returns until the money is paid out in claims.
- stock Float: If a company has issued 1 million shares of stock, but 400,000 of these shares are held by insiders and aren’t available for public trading, then the float is 600,000 shares.
- Float in Cash Management: Suppose a business writes a check for $1,000 to a supplier. When the supplier deposits the check, there is a period where the $1,000 is deducted from the business’s account but has not yet been credited to the supplier’s account. This $1,000 is considered to be “float” during the clearing period.
In all these cases, “float” represents money that is temporarily in a state of limbo during some form of transaction or process.