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Market capitalisation is a concept in the stock market that can assist in understanding the size and value of a company. However, the traditional market capitalisation measure may not always represent the publicly available value of a company. This is where Free Float Market Capitalisation is considered, a metric that focuses only on the shares available for trading in the market.
This article explores what free float market capitalisation means, its role, how it is calculated, and its relevance for investors.
Market capitalisation (or market cap) refers to the total market value of a company's outstanding shares. It serves as an indicator of a company's size and financial position.
Market Capitalisation = Total Number of Outstanding Shares × Current Market Price per Share
For example, if a company has 1 Crore shares outstanding and the current share price is ₹500, the market cap would be:
1 Crore × ₹500 = ₹500 Crores
However, this traditional measure includes all shares, including those held by promoters, government entities, or locked-in shares that are not freely traded in the market.
Free Float Market Capitalisation represents the market value of only those shares that are available for public trading in the open market.
Unlike traditional market capitalisation, free float market cap excludes shares held by promoters, government bodies, and other restricted holdings that are unlikely to be sold in the near term.
Free float market cap provides a perspective on a company's market value from an investor’s viewpoint. It reflects the liquidity and availability of shares in the market, which relates to pricing and volatility.
The free float of a company consists of shares that can be freely bought and sold in the market without restrictions. It excludes:
Promoter holdings
Government holdings
Shares locked-in due to regulatory or contractual agreements
Shares held by strategic investors or insiders with restrictions
For instance, if a company has 100 Crores shares, but promoters hold 60 Crores locked-in shares, the free float shares are only 40 Crores.
The Free Float Market Capitalisation can be calculated using the following formula:
Free Float Market Capitalisation = Free Float Shares × Current Market Price per Share
To find the free float shares, apply the formula:
Free Float Shares = Total Outstanding Shares – Restricted Shares
Or equivalently, if you have the free float percentage:
Free Float Market Capitalisation = Market Capitalisation × (Free Float Percentage / 100)
Suppose a company has:
Total Outstanding Shares = 100 Crores
Market Price per Share = ₹200
Promoter and Restricted Shares = 60 Crores
Free Float Shares = 100 Crores – 60 Crores = 40 Crores
Free Float Market Cap = 40 Crores × ₹200 = ₹8000 Crores
Alternatively, if the free float percentage is 40%, then:
Free Float Market Cap = Market Cap × 0.40
= (100 Crores × ₹200) × 0.40 = ₹20,000 Crores × 0.40 = ₹8,000 Crores
Free float market capitalisation plays a role in:
Stock Market Indices: Indices like the Nifty 50 or Sensex use free float market cap to weight companies, as this reflects the investible market.
Liquidity Assessment: Stocks with a larger free float tend to exhibit greater liquidity, indicating more shares available for trading.
Volatility Insights: Companies with a smaller free float may exhibit price volatility due to limited shares available to absorb large trades.
Investment Decisions: Institutional and retail investors use free float metrics to understand the publicly traded size of a stock.
Refer the following table:
Aspect |
Traditional Market Cap |
Free Float Market Cap |
|---|---|---|
Definition |
Value of all outstanding shares |
Value of only freely tradable shares |
Includes Restricted Shares? |
Yes |
No |
Reflects Market Liquidity? |
Limited |
Yes |
Used in Most Stock Indices? |
Less Common |
Common |
Understanding free float provides insights for investors to:
Consider stocks with particular liquidity characteristics for buying and selling.
Assess stocks with significant promoter holdings where share availability may be limited.
Understand volatility aspects related to the supply of shares in the market.
Support portfolio diversification decisions based on publicly available market size.
Free float market capitalisation provides a particular method for investors to understand a company's market value. By focusing on freely tradable shares, it reflects liquidity, trading characteristics, and market dynamics. Understanding this metric can support decision-making for investors and aligns with how stock indices represent market performance.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI) Guidelines
National Stock Exchange (NSE) Official Website
Bombay Stock Exchange (BSE) Official Website
Investopedia – Market Capitalisation and Free Float
Economic Times Market Data
A free float refers to the shares of a company available for trading by the public, excluding locked-in shares held by promoters, governments, or insiders. It reflects the actual shares investors can buy or sell.
Total market capitalisation includes all outstanding shares, while free float market cap considers only the publicly tradable shares. Free float market cap better represents the stock’s liquidity and real market value.
Indices use free float market cap to more accurately reflect the investible shares in the market. This ensures the index weight corresponds to shares actually available for trading, improving its reliability as a market indicator.
Yes. A smaller free float means fewer shares are available, which can relate to price volatility. A larger free float is generally associated with increased liquidity and can influence price movements.
No. It changes with promoter share sales, new share issues, lock-in period expiries, and corporate actions, so it’s important to monitor periodically.
Free float information is available on stock exchange websites like NSE and BSE, company reports, and financial data platforms used by brokers and investors.
Not necessarily. While a larger free float is generally associated with increased liquidity, investment decisions also involve company fundamentals and market conditions.
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Posted on 05 Jun
Geetanjali Lachke
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