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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?
But let’s first understand what is 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 total value of publicly traded shares, excluding those held privately by government entities and company insiders.
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.
| Trade Information | Infosys Ltd | TCS Ltd |
| Share price | ₹1,505.55 | ₹3,562.35 |
| Traded Volume (Shares) | 64,44,213 | 26,04,721 |
| Traded Value (₹ Lakhs) | ₹97,048.56 | ₹92,815.07 |
| Total Market Cap (₹ Lakhs) | ₹6,24,85,712.64 | ₹13,03,48,216.59 |
| Free Float Market Cap (₹ Lakhs) | ₹5,37,37,712.87 | ₹3,64,97,500.64 |
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.
A company with a smaller free float is deemed more volatile as fewer shares are subject to market conditions.
Advantages of free-float market capitalisation
- This market capitalisation method, excluding locked-in shares, provides a more accurate and realistic view of a company’s market position.
- Publicly available shares impact stock volatility and liquidity, crucial factors in 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 nifty is 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.
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.
Free float market cap = Price * Equity * Investible weight 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.
FAQs
A free-floating market, also known as a public float, refers to the shares of a company that are freely traded on the stock exchange and are not held privately by major inside players. In other words, it represents the number of shares that are available to the public for trading in the secondary market. This method of calculating market capitalisation excludes locked-in shares, such as those held by insiders, promoters, and governments. It’s considered to provide a more accurate reflection of market movements and stocks actively available for trading.
A high free float is generally considered good as it indicates more liquidity and active trading of the company’s stocks. This can make it easier for investors to buy or sell shares at their desired price. However, a high free float could also suggest that insiders are reducing their holdings, potentially signalling a lack of confidence in the company’s prospects. Conversely, a low free float can lead to higher price volatility due to fewer available shares, resulting in significant price fluctuations.
Free float in the Critical Path Method (CPM) refers to the amount of time an activity can be delayed without impacting the Early Start date of any of its immediate successors. It’s a measure of schedule flexibility and is calculated as the difference between the Early Start of the successor activity and the Early Finish of the current activity. Free float is crucial in project scheduling as it helps in identifying potential delays and mitigating risks.
Market capitalisation refers to the total value of a company’s outstanding shares, calculated by multiplying the share price by the total number of shares. It includes both publicly traded and privately held shares. On the other hand, free float, also known as free-float market capitalisation, only considers the shares that are publicly available for trading. It excludes shares held by insiders, promoters, and governments. Therefore, the value of free-float market capitalisation is always lower than the company’s actual market capitalisation.
No, the free float cannot be negative. Free float refers to the number of shares of a company that are publicly owned and available for trading. The minimum value it can have is zero, which means no shares are available for trading. A negative free float would suggest that more shares are being traded than actually exist, which is not feasible. Therefore, free float is always a non-negative quantity.