Free Float Market Capitalization

What is Free Float Market Capitalization?

Free Float Market Capitalization is a method by which the market cap of an index’s underlying are calculated and are calculated by multiplying the price with the number of outstanding shares and does not consider the shares that are held by promoters, insiders and the government.

Brief Explanation

Free float market capitalization calculates the market capitalization of the company after taking into consideration only those shares of a company that are actively traded in the open market and are not held by the promoters or is locked-in shares in nature. Free shares are those shares that are issued by the company which are readily available and are actively traded in the market.

These shares exclude the following shareholders but are not limited to: –

The method is also known as float-adjusted capitalization. Under this method, the resulting market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more will always be lesser than the full capitalization method. The free float methodology has been widely adopted by most of the world’s major indexes. The famous indexes which currently use the free-float method are S&P, FTSE, and MCI index.

Formula to Calculate Free Float Market Capitalization

Free-Float Market Capitalization formula

Calculation

Let us assume that there is a company XYZ with the following details –

Current Market Price is $50 per share. Find out the Market Capitalization and Free Float Market Capitalization

Market Capitalization = total number of shares x current market price = $50 x 20,000 = 1000,000 = $1 million

It involves the following steps –

  • Number of shares not available for trading = Promoter Holding + Locked shares with Shareholders + Strategic Holding
  • = 5,000 + 2,000 + 1,000 = 8,000 shares
  • Free Float Market Capitalization = $50 x (20,000 – 8,000) = $50 x $12,000 = $600,000

Advantages

How should investors use Free Float information?

A risk-averse investor looks to invest in the shares generally where there is large free-floating of shares, which in turn results in less share price volatility. The share is actively traded, which also increases the volume of share, giving the investor an easy exit in case of a loss. The shareholding of the promoter party is also less, therefore, giving the retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more more voting rights and power to actively participate in the company’s initiatives and express his opinion and solutions to the board.

Development of Free-Float Factor in BSE Sensex (India)

In India, the Bombay Stock Exchange has developed a platform whereby each company listed on the exchange needs to submit the shareholding pattern of the companies quarterly. It is done to determine the free-float factor which the Exchange adjusts to the full market capitalization method. It is rounded off to the higher multiple of 5, and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.

Free-Float Bands

Free-Float Bands
Source:- Bse Website

To calculate the free-float market capitalization of any company in the exchange, the above factors are multiplied as per the information provided by the company.

This article has been a guide to what is Free Float Market Capitalization. Here we discuss Free Float Market Capitalization calculation along with its Formula and how investors can use it. You may also have a look at these articles below to learn more about valuations –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *