Explore how free-float market capitalisation provides a clearer reflection of actual market activity and why it has become the global standard in index construction.
Market capitalisation is one of the most common ways to measure a company’s size in the stock market. However, when it comes to building stock indices that mirror real market performance, free-float market capitalisation is considered more accurate. Unlike the total market capitalisation, this method includes only the shares available for public trading, excluding promoter, government, or other locked-in holdings.
Also known as float-adjusted market capitalisation, this approach has become the global benchmark for index construction. It is widely adopted in major indices such as the Nifty 50 and Sensex in India, as well as across international markets, ensuring indices reflect true liquidity and investable market value.
Free-float market capitalisation in the stock market refers to the total market value of a company’s shares that are freely available for trading by the public. It excludes shares held by promoters, government bodies, or strategic investors that are not typically sold in the open market.
This method, often called float-adjusted market capitalisation, is preferred because it represents the portion of equity that actively contributes to market activity. By focusing only on the shares that can be traded, it provides a more realistic assessment of a company’s size and its influence on stock indices.
The basic formula for free-float market capitalisation is:
Free-float Market Cap = Share Price × Number of Free-float Shares
Consider AlphaTech Ltd., a company listed on the stock exchange.
Total shares and price
Outstanding shares: 100 Crores
Current share price: ₹200
Promoter / non-tradable shares
30% of the shares are held by promoters and long-term strategic investors.
These are not available for public trading.
Free-float percentage
Publicly tradable portion = 70%
Free-float shares = 100 Crores × 0.70 = 70 Crores
Calculation of free-float market capitalisation
Free-float Market Cap = ₹200 × 70 Crores
= ₹14,000 Crores
So, the free-float market capitalisation of AlphaTech Ltd. is ₹14,000 Crores.
This figure is used for inclusion in indices such as the Nifty 50 or Sensex, ensuring a fair reflection of market liquidity and tradeable value.
Free-float market capitalisation provides a more accurate and investable view of the market. By considering only publicly tradable shares, the methodology avoids over-representing companies with low market liquidity. Below are the key advantages:
It highlights only the shares available to the public, offering a true picture of a company’s investable market value.
Companies with large promoter holdings but limited public float do not dominate the index, ensuring balanced weight distribution.
A higher public float often indicates stronger transparency and governance, as companies are accountable to a broader base of shareholders.
Major indices like Nifty and Sensex use the free-float approach for accurate representation of market activity and liquidity.
It enables fair comparison between companies by considering only tradeable shares rather than total outstanding shares.
Indices built on the free-float methodology more accurately represent market behaviour and investable value by considering only publicly tradable shares.
Stock indices are designed to represent overall market sentiment and economic performance. To achieve this, they must focus on shares that are actively traded and influence market dynamics. The free-float method ensures accuracy in this process in the following ways:
Representation of Actual Market Activity
Free-float methodology tracks only the shares that contribute to day-to-day trading, reflecting true market interest and liquidity.
Minimises Skewed Weightages
If total market capitalisation were used, companies with large promoter holdings but limited public float would carry disproportionate weight in the index. The free-float method prevents this imbalance.
By focusing on tradeable equity, the free-float method ensures indices are accurate, investable, and aligned with market reality.
India uses the free-float market capitalisation method in its primary indices to ensure that index weightings reflect the proportion of shares that are available for public trading. This helps maintain consistency with global index construction practices and provides a more accurate representation of investable market value.
Nifty 50 and Sensex Methodology
Both Nifty 50 and Sensex apply the free-float market capitalisation model to determine how stocks are selected and weighted within the index. This ensures that companies with greater public shareholding have proportionate influence on index movements.
Semi-annual Reviews
The composition of these indices is reviewed twice a year based on publicly available data. These reviews account for changes in shareholding patterns, including shifts in public float and changes in company fundamentals.
Weight in the Index
A company’s weight in the index is linked to its free-float market capitalisation. When the proportion of publicly traded shares increases, the company's index weight may rise. Conversely, a reduction in public float may result in a lower weight.
Example of Rebalancing
If Company A issues new shares to the public, its free-float increases, raising its index weight.
If it conducts a share buyback, the free-float reduces, leading to a lower weight in the index.
This approach aligns Indian indices with global standards and improves the representation of tradeable market capital within the index.
By focusing only on shares available for public trading, the free-float method ensures indices present a realistic, tradeable snapshot of market performance. It eliminates distortions caused by locked-in holdings and improves comparability among companies, making index-based benchmarks such as the Nifty 50 and Sensex more representative of market activity.
As a globally recognised methodology, free-float market capitalisation continues to guide the creation of indices that accurately reflect liquidity and overall market value.
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.
Free-float counts only the publicly tradable shares, whereas full market cap includes all outstanding shares.
It helps indices reflect actual market trends and liquidity, offering a more accurate benchmark.
It is the ratio of freely traded shares to total outstanding shares, typically disclosed in quarterly filings.
Yes, due to events like share buybacks, public offerings, or promoter stake changes.
Free float is calculated by subtracting promoter, government, and other locked-in shares from the total outstanding shares, leaving only the portion available for public trading.
A low free-float market capitalisation indicates limited shares are available for public trading, which may reduce liquidity and increase price volatility in the stock.
A 100% free float means all the company’s outstanding shares are available for public trading, with no holdings locked by promoters, government, or strategic investors.
Free float can be zero if all the company’s shares are held by promoters, government entities, or insiders, leaving none available for public trading.
An example of free-float methodology is seen in the Nifty 50 index, where only publicly tradable shares of companies are considered to determine their weight in the index.
The free float is owned by retail investors, institutional investors, mutual funds, and other market participants who buy and sell shares in the open market.