Free Float Market Capitalisation: There are many ways to measure the size of a company.

One such way is the free float market capitalization method.

Many Indian business houses use this method to arrive at the value of an index.

What is market capitalization?

  • Market capitalization, or market cap, is the outstanding number of shares multiplied by the price of each stock.
  • So, for example, if the total outstanding shares of a company, ABC Ltd., is 10,000 and each share is priced at Rs. 50, then the market cap of the company stands at Rs. 5 lakhs.
  • Based on the market cap, the companies are classified as large-cap, mid-cap, or small-cap.

What is free-float market capitalization?

  • In the standard market cap calculation, the total number of outstanding shares will include both public and privately owned shares.
  • But in a free float market cap, the valuation of the company will rely on the outstanding shares of the company that are held publicly.
  • This share number will then be multiplied by the price for each share.
  • Here, the shares owned by the trusts, government bodies, and promoters are ignored.
  • This will indicate that the value of the free float market cap will always be lower than the actual market cap of the company.
  • It is also known as float-adjusted capitalization.

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Examples of free-float market capitalization:

  • Let us understand this concept better with the help of an example,
  • Company A has 10,000 outstanding shares and each is priced at Rs. 20.
  • Of these, 4000 shares are held publicly, whereas the remaining 6000 shares are owned privately.
  • Now, we will calculate the market cap as well as the free float market cap.
  • The market cap of company A is:
  • 10,000 * 20 = Rs. 200,000.
  • The free float market cap of company A is:
  • Publicly owned shares * price of each share:
  • 4000 * 20 = Rs. 80,000.

Advantages of using a free float market cap:

The following are the main advantages of using a free-float market cap:

Advantages of using a free float market cap
Research By, Trading Fuel Lab

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Presents a practical picture:

  • The total market cap includes the shares that are currently available as well as those that are presently locked in.
  • Whereas, the free float market cap will only consider the number of shares that are currently available in the market for trading.
  • Thus, this process is more useful because it will give a true picture of the enterprise.

Market-driven technology:

  • This calculation process will eliminate the companies that have a minimal number of shares available for trading in the market.
  • Hence, investors can also locate businesses where they can park their extra funds after buying public shares using this technique easily.

No distortion of valuation:

  • The market cap of large companies can fool investors into thinking that their shares are readily available for trading, whereas the reality is just the other way round.
  • With the help of a free-float market cap, broad-based indexing is possible, which will minimize the concentration of such companies with large market cap values.

Market volatility and free-float market capitalization:

  • The free float market cap is inversely proportional to the volatility in the market.
  • A higher free float will indicate that the investors are rapidly selling and purchasing shares.
  • If the free float is low, it will indicate higher volatility.
  • At this stage, the traders cannot affect the market price in a noticeable manner.
  • Thus, traders mostly prefer dealing with the shares of companies that have a higher free float.
  • By doing so, the traders can buy and sell shares freely without even affecting the overall price of the index.

Also Check: What Are Large Cap Funds?

Conclusion:

We hope that the above blog gives you clarity about the Free Float Market Capitalisation method.

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Frequently Asked Questions (FAQs)

Answer: Free float stocks are defined by the number of outstanding shares minus the number of shares that are restricted from trading.
Answer: Free float is generally owned by public investors.
Answer: Yes, there can be a negative free float, which means that the activity is behind schedule.
Answer: The good free float percentage is between 10 and 25%.
Answer: Reliance Industries is number one in the share market.
Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.