Rajesh Nirgude/AP
Rajesh Nirgude/AP

De-jargoned: Free float

Free float market cap refers to the number of shares that are available for trading

Free float market capitalization refers to the number of shares that are available for trading in the open market. It excludes shares held by promoters, government holding, strategic holding and other locked-in shares, which will not come to the market for trading in the normal course.

Markets regulator Securities and Exchange Board of India had issued a mandate in 2013, whereby all listed companies need to have at least 25% of the shares as free float (public sector enterprises have three more years to meet this requirement).

The shareholding pattern data is available publicly on stock exchanges’ websites and is updated every quarter. To calculate the free float market cap on a particular day, you will have to multiply the number of shares by the day’s closing share price of the company.

Free float index

There are two ways to determine the value of an index: full market cap and free float market cap. The former takes into account all the shares, even the ones that are held by promoters and government or are locked-in otherwise. The latter methodology uses just the number of publicly traded shares.

The free float market cap method is preferred over the full market cap way as it reflects the trading activity and liquidity in the market better by taking into consideration only those shares that are available for trading in the market, and, thus, provides a more accurate reflection of market movements.

Bombay Stock Exchange’s S&P BSE Teck was India’s first free float index (launched in 2001), followed by the BSE Bankex (2003). BSE’s flagship index, the Sensex, started using the free float method in September 2003. Until then, the Sensex and the other indices were using the full market cap method. Internationally, too, most exchanges—Nasdaq, FTSE, Dow Jones, S&P, STOXX and others—follow the free float method.

Free float and the investor

Looking at a company’s free float provides investors some insight into a stock’s volatility. The smaller a company’s percentage of free float shares, the more volatile can its stock be. Say, a company with low free float announces good quarter results. Its share price is likely to rise as there would hardly be any shares to trade in. If there are only a few shares in the float, it means that shares are harder to buy and their buying price will go up. If the news is bad, the stock could fall harder.

If a company has more shares available to the public, it will be less prone to violent swings in share prices.

Institutional investors prefer to invest in stocks with larger percentage of free float shares as they can transact in a particular scrip without affecting its share price much.

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