Free float market capitalisation – What is it, and how is it calculated?

Have you heard of market capitalisation?

A significant tool to analyse a company’s size and position, market capitalisation is the total value of all outstanding shares of a public company.

The outstanding shares include all the shares held by internal members of the company and the shares available to the public.

A slight modification of this concept has given rise to free float market capitalisation.

What is free float market capitalisation?

Let us begin by understanding what is a free float.

The number of shares of a stock that is freely available for the public to trade is called the free float.

So, free float market capitalisation is the overall value of shares at the disposal of the public. This excludes shares held privately by government organisations and others within the company. It purely considers the shares available for public trading in the open market.

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Calculation

Free float market capitalisation formula:

= Total number of shares for public trading * Current market price per share

The number of shares available for the public can be arrived at by deducting the number of locked-in shares from the total number of shares issued.

Locked-in shares include shares held by:

• Owners and directors
• Promoters
• Government agencies
• Other private bodies and trust
• Any other party who does not trade them in the stock market.

Example 

Consider ABC Ltd is a public company with 100,000 outstanding shares of ₹ 100 each.

Of the 100,000 shares – The founders hold 20,000 shares, directors hold 15,000 shares, and another 10,000 shares are reserved for employees under the Employee Stock Option Plan.

The remaining shares are available for trading.

The market capitalisation of ABC Ltd:

Total number of shares outstanding * Price per share

= 100000 * 100

= ₹ 10,000,000

Free float market capitalisation of ABC Ltd:

Total number of shares for public trading * Price per share

Shares for public = 100000 - 20000 - 15000 - 10000

= 55000 * 100

= ₹ 5,500,000

Real-world scenarios

Below are the details of two stocks listed on the National Stock Exchange (NSE) as of 14 Sep 2023.

Looking at the information of the two companies, it can be noted that TCS has a higher market capitalisation. But, the free float market capitalisation of Infosys is higher.

The primary factors driving this are the number of shares issued and the number of shares offered to the public.

While comparing different companies using these factors, the company having a smaller free float is considered more volatile. This is because the number of shares that can be influenced by market conditions is lesser.

Also Read: Understanding blue chip stocks – Meaning, features and their safety

Advantages of free float market capitalisation

• This method of market capitalisation is considered more realistic and accurate. Since it does not consider locked-in shares, this gives a better picture of the company’s position in the market.
• The number of shares open to the public influences the volatility and liquidity of stocks. Liquidity and volatility are significant while making investment decisions.
  Market capitalisation may not give the right picture here as it includes privately held shares as well. 
• Various stock indices across multiple stock exchanges use the free float factor while calculating market capitalisation.
• Market capitalisation is one of the tools used in classifying companies as small-cap and large-cap companies.
  Companies with high locked-in capital get the advantage of falling under large-cap because of the market capitalisation method.
  Hence, free float is considered more accurate in categorising companies.

How is NIFTY calculated using the free float factor?

The stock market uses various indices to analyse the performance of stocks and the market, as a whole. One of the indices is NIFTY.

NIFTY is made up of two words – National Stock Exchange and Fifty. This is a stock market index formulated by the National Stock Exchange. It helps in ranking the top 50 stocks, out of all the stocks listed on the exchange.

It also represents the overall performance of the stock market by considering the weighted average of the top 50 stocks.

Also Read: Difference between Nifty and Sensex

The free float factor is a significant component in calculating NIFTY.

NIFTY Index = Current market value / (Base market capital * 1000)

The base year and base value of 1995 and 1000 have been set by the NSE.

Considering all 50 companies, the current market value is the weighted total market capitalisation and base market capital is the weighted average market capitalisation in the base year.

The weighted total market capitalisation involves the free float factor.

The investible weight factor refers to the free float factor, i.e., the total number of shares in the open market / total number of shares outstanding.

Bottomline

We now know what is a free float and how significant it is in calculating market capitalisation and stock market indices.

Various stock markets across the globe like NASDAQ, BSE, and others use the free float method to calculate indices.

Investors must also consider the free float value over the standard market capitalisation value while making decisions, to be more clear and accurate about the stock’s condition.