Guide For Free Float Market Capitalisation- Meaning, Benefits, and Calculation

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The size of the company is measured in several ways. A free-float market capitalization method and a total market capitalization method are the only two methods. The value of an index is determined by the free float market capitalization method used by the share market. But how much difference will this approach make in valuing a company's size? Let’s see ahead in this article.

What Is Meant By Free-Float Market Capitalisation

Market capitalization measures the company's total number of issued shares. Since some are privately held and restricted from being publicly traded, all outstanding shares may not be freely traded on the market. Free-float market capitalization shall only consider free-float securities and excludes those limited to trading on a public basis.

A critical number that investors may consider when determining whether the stock is appropriate to their portfolio is the free-float factor or its percentage of float. All the shares, which are public or owned by promoters, governments, and other private entities, shall be added to the share price to calculate the overall market capitalization of a company. Shares held by private parties such as promoters, trusts, or the government from the free float market capitalization are excluded. 

To reach an enterprise's free-float market capitalisation, investors only consider publicly held and traded shares, multiplying them with the share price.

Let's Have An Example And See How It Works. 

Imagine company B has 60,000 shares traded on the public market, and promoters and family members hold 40,000. Stock with a face value of Rs. 50 will have a market cap of 50 lakhs. However, the company's free float market value is INR 30 lakh. In the case of companies with a large government holding, the difference between the total market cap and the free float market cap would be more pronounced.

 

How To Calculate Free Float Market Capatilastion?

The formula to calculate the free float market capitalization is as follows;

Free Float Market Capitalization = (Total Number of Outstanding Shares – Number of Shares Not Available for Trading by Public)

Example of Free Float Market Capitalization 

Let's say that a company holds 5,00,000 shares in total, with promoters holding 50,000 and group companies holding 40,000 while the government owns 10,000. The stock is currently trading at Rs.100.
 

When Rs.5,00,000 is multiplied by 100, its whole market capitalization equals Rs. 5,00,00,000. However, its free-float market cap is Rs. 4,000,000 (5,000,000 - 50,000 - 40,000 - 10,000) * 100. The reason is that there were only 4,000,000 shares available for trade.

A list of shares that are not covered by the floating market cap is given below;

  1. Shareholding of promoter and promoter group 
  2. State holding in the capacity of a strategic investor 
  3. Shares held by promoters through ADR/GDRs 
  4. Corporate bodies' strategic stakes 
  5. Investments under the category of foreign direct investment 
  6. Crosses Holdings and Employee Welfare Trusts own the equity of associate group companies 
  7. The shares are in the locking category.

Benefits Of Free Float Market Capitalization

1. The free float system accounts solely for shares or stocks currently on the market for trading. This approach is more practical than the total market capitalization to estimate an enterprise's intrinsic value, risk of investments, and growth potential.

2. The real market trends are reflected more accurately in an index that only considers free-float market capitalization. In this way, the index avoids the concentration of the top companies in the index with a lower free float market cap.

3. A cap on the free float market allows a wide range of indexing. It also reduces the focus of investors and traders on companies with high market capitalizations but low free float.

Relation Between Free-Float And Market Volatility

Market volatility is the risk or potential for price fluctuation of any security to be traded on a stock exchange. The volatility in the share price is inversely proportional to the free float level. A high float means an ample supply of stocks, and traders are less likely to manipulate prices. A decrease in the free float results in an increased influence on the cost of shares by control shareholders. Therefore, before investing, you need to know this concept and consider the cap on the free float market.

Implications Of Free Float Capitalisation For The Market

The significant implication of free-float market capitalization is in calculating index value. The free-float market capitalization, i.e., the company with the most floating shares, shall be considered when determining the benchmark indices' constituents and their weightings in the index.

What's The Free Float Factor?

A Multiple that indicates the percentage of a company's overall capitalization that is free to trade in public markets is known as its free float factor. In other words, if the free float value of a company is 0.61, it means that 61% of all market capitalization can be considered free float. A less accessible float factor will not be a good indicator of liquidity. A low free float factor would indicate that the corporation has more tightly managed shares and less liquidity with less actively traded shares. This is the case.

Conclusion

Market capitalization provides information on the market value of shares in a company. The free-float market capitalization tells how many shares could be traded by the public and their effect on the share market price. After the free float market cap has been checked, it is essential to select stocks.

 

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Free Float Market Capitalization FAQs?

There are two ways stock prices can be affected by the free float ratio. First, investors will avoid that company if the free float ratio is low. Second, the reduced float ratio indicates a lower number of shares on the market, which might make it hard for this stock to maintain liquidity in the capital markets.

A negative float, meaning that the activity must be started before the previous activities are over to meet the target end date of completion, which is likely caused by delays in preceding action, can be described as a negative float.

Free Float = Outstanding Shares-Restricted Shares-Closely Held Shares, and Free Float Adjusted Market Capitalization = Outstanding Shares-Restricted Shares-Closely Held Shares. Free Float Adjusted Market Capitalization is calculated as follows: (Existing Shares - Restricted Shares) * Market Share Price.

The overall market cap accounts for the total number of outstanding shares, an essential difference between a free-float market cap and a market cap. By contrast, the free-floating market cap does not consider all shares made available to the public for trading.

For example, the company may increase its free float by selling shares in a secondary offer or through a stock split. Furthermore, the free float is increased when restricted shares are unrestricted.


 

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