Updated on March 20, 2023
Free Float denotes the market capitalization of a company where shares held by promoters, directors, trusts, government etc are not considered for its market-cap calculation.
Free Float Explained
Generally, the market capitalisation or M-Cap of a company is calculated by multiplying the number of outstanding shares by its price. So, the market-cap of a company with 1,00,000 outstanding shares @ INR 50 will be INR 50,00,000.This is also the basis of calculation for categorizing companies into Large, Mid and small caps.
However, under the Free Float mechanism, only the publicly held shares are taken into account for arriving at the market cap. Free Float method also means that the M-Cap will be lower than the consolidated market-cap otherwise calculated.
Traders watch this factor closely as the actual market capitalisation does not give a true picture of a company’s shares available for trading.
Importance of Free Float
Importance of Free Float can be explained as:
1. It is considered as the true and accurate measure of market capitalisation because only actively available and traded shares are considered.
2. Companies with substantial free float are generally considered better managed and transparent, as otherwise, few big shareholders would have some power to impact share price meaningfully.
3. More and more companies and stock exchanges are preferring this methodology of Market Capitalisation calculation.