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What is Market Capitalization?
Market capitalization is also known as market cap. It is a method or a term to describe the current share price and the total number of outstanding shares against its market worth. It is one of the most significant qualities of a company. Moreover, it helps potential investors in recognizing the possible risks and growth potential associated with investing in the company’s stock. The market capitalisation of a company can be determined by multiplying the number of outstanding shares by the stock’s current market price. Now let’s look at what is free-float market capitalization.
What is Free Float Market Capitalization?
Free Float Market Capitalization is a narrow approach to understanding the current value of a company. Companies issue a portion of their share capital to their promoters, directors, welfare trusts, and so on. This share capital is not available for the general public and hence does not trade on the stock market. As the name suggests, a free-float market capitalization is that portion of the share capital which is available for the general public to trade on the stock market.
The controlled shareholding investments of promoters and others are based on factors like maintaining control rather than the financial success of the company. The purpose of the free float market cap is to differentiate between strategic (control) shareholders and public shareholders. The investments of public shareholders are based on the stock’s price and their assessment of a company’s future growth.
Formula for Free Float Market Capitalization
Free Float Market Capitalization = (Total Number of Outstanding Shares – Number of Shares Not Available for Trading by Public) * Share Price
To calculate it, you must exclude the following categories of shareholdings:
- Shares held by promoters, founders/directors/acquirers with a control element
- Shares held by persons/ bodies with “Controlling Interest.”
- Government(s) holdings as promoters/acquirers
- Holdings through the FDI route
- Strategic stakes of private corporate bodies/ individuals
- Inter-company holdings through associates, subsidiaries, parent, or group companies.
- Shareholdings by Employee Welfare Trusts
- Any residual or lock-in number of shares which are not eligible for a sale in the open market in a normal course.
Illustration of Calculation of Free Float Market Capitalization
The following is the details of the shareholding of Macke and Company Limited.
| Particulars | Amount |
| Total Number of Shares Outstanding | 2,50,000 shares |
| Shares Held by Different Individuals and Entities | |
| Subsidiary Company | 24,000 shares |
| Promoters, Founders, and Directors | 11,000 shares |
| Employee Welfare Trusts | 12,000 shares |
| Current Market Price Per Share | Rs 52 |
Free Float Market Capitalization Calculation
| Particulars | Amount |
| Total Number of Shares Outstanding | 2,50,000 shares |
| Number of Shares Not Available for Trading by Public | 47,000 shares (24,000 + 11,000 + 12,000) |
| Number of Shares Free For Trade | 2,03,000 shares (2,50,000 – 47,000) |
| Current Market Price Per Share | Rs 52 |
| Free Float Market Capitalization (Total Number of Outstanding Shares – Number of Shares Not Available for Trading by Public) * Share Price | Rs 1,05,56,000 (2,03,000 shares) * Rs 52 per share |
Advantages of Free Float Market Capitalization
- Only shares or stocks that are currently available in the market for trading are taken into account by the free-float system. In order to estimate a company’s fundamental worth, risks of investing, and growth potential, this approach is a more realistic method over total market capitalization.
- Free-float market cap allows broad-based indexing. In turn, it reduces the focus of investors and traders from companies with high market caps but low free floats.
- An index that considers only free float market capitalization reflects realistic market trends with more accuracy. This way the index avoids a concentration of top companies on the index with less free float market cap.
What is the Free Float Factor?
The free float factor is a multiple that indicates what percentage of the total capitalization of the company is free for public trade. For instance, if the free float factor for a company is 0.61 then it implies that 61% of the total market capitalization is the free float market capitalization. A lower free float factor would not be a good indicator of liquidity. Since a low free float factor would imply that the company has controlled a higher number of shares and a lower liquidity with lower trading outstanding shares.
Relation of Free-Float with Market Volatility
Market volatility is the risk or probability of price fluctuation of any security that is being traded on the stock market. The volatility in the stock prices is inversely related to the size of the free float. Higher float denotes a large supply of stocks and a lower probability of price manipulation by traders. A lower free float implies that the controlling owners have a higher impact on stock prices. Hence, you must understand the concept and consider free float market cap before investing.
Frequently Asked Questions
It depicts a complete picture of the company in comparison to the total market capitalization. A higher free float market capitalization means that the market price will be free of any manipulation. A lower free float market capitalization would imply that the stocks of the company are highly controlled by the promoters and other private shareholders. An investor can use it to understand how liquid the company is and the extent of uncontrolled market capitalization. It is important for every investor to understand the concept of market capitalization to make a well informed decision.
The difference between market capitalization and free float is the number of shares that is not available for open trade on the stock exchange. These shares are controlled by the company and private ownership of promoters, founders, holding companies, agencies, and so on.
The free float market cap is important because it tells how much of the company’s total share capital is available for open trade. This information helps investors and traders in understanding the liquidity, level of volatility, and concentration of such companies as large-cap, mid-cap, and small cap companies.
A high free float factor in stocks means that a higher number of shares of the company are traded on the stock exchange. This means that the market will reflect the true value of the company and lower the chances of price manipulation.
The public investors and traders own the free float market cap. These shares are not controlled by the company in terms of ownership.
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