All shares, including those held by promoters, the government, or other private parties as well as those that are publicly traded, are multiplied by the stock price to determine a company's overall market capitalization. However, we do not include shares held by promoters, trusts that are aligned with promoters (such as family endowment trusts or employee welfare trusts), or the government (in the case of PSUs) in the free-float market capitalization. To calculate a company's free-float market capitalization, we only take into account the shares that are owned and traded by the general public and multiply those by the share price.
Free float market capitalization formula:
Free Float = Outstanding Shares-Restricted Shares-Closely Held Shares, and Free Float Adjusted Market Capitalization = Outstanding Shares-Restricted Shares-Closely Held Shares. Free Float Adjusted Market Capitalization is calculated as follows: (Existing Shares - Restricted Shares) * Market Share Price. Assume that out of the 60,000 publicly traded shares of business XYZ, 40,000 are held by the promoters and their families. Each stock's market price is 50 rupees. The market capitalization would now be Rs. 50 lakh. However, the company's free-float market cap is Rs. 30 lakh. In the event of businesses with sizable promoter interests, there would be a more obvious distinction between total market cap and free-float market cap.
The following equation can be used to get the free float market capitalization:
Total Outstanding Shares - Shares Not Available for Trading by Public = Free Float Market Capitalization.
Example of Free Float Market Capitalization
Consider a business that has a total of 5,00,000 shares, of which the promoters own 50,000, group companies 40,000, and the government 10,000. Currently, the stock is trading at Rs. 100.
If you multiply Rs. 5,000 by 100, the market value of the company is Rs. 5,000,000,000. The market capitalization of its free float, however, is Rs. 4,000,000 (5,000,000 - 50,000 - 40,000 - 10,000) * 100. There were only 4,000,000 shares available for trading, which is the cause.
The free float system only takes into account shares or equities that are currently traded. This method is more useful for determining an enterprise's underlying value, investment risk, and growth potential than the total market capitalization.
An index that just takes into account free-float market capitalization more properly reflects the real market dynamics. By avoiding the concentration of the top companies with a lower free float market cap, the index avoids this problem.
A free float market cap provides for a wide variety of indexing. Additionally, it lessens the emphasis that traders and investors place on businesses that have large market caps but little free float.
The National Stock Exchange and Bombay Stock Exchange in India employ free-float market capitalization to determine index value in one of its most significant applications. The total free-float market capitalization of all the listed firms makes up this amount. This means that a company with a higher free-float component will also have a higher market weight in the index.
The free float's size is inversely correlated with stock price volatility. Higher float denotes a plentiful supply of stocks and a lower likelihood of price manipulation by traders. A smaller float size, however, suggests that the controlling owners have a bigger impact on stock prices. And for this reason, before deciding to buy, investors are also considering the company's free float.
Market capitalization gives details on how much a company's shares are worth in the open market. The free-float market capitalization indicates the number of shares that the public may exchange and their impact on the share price. It is crucial to choose equities after looking at the free float market cap.
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Free Float Stocks are calculated as follows: Total Shares Outstanding - Total Shares Restricted from Trading.
A negative float, which is most usually brought on by delays in preceding action, is one where the activity must begin before the prior ones are finished in order to meet the intended end date of completion.
One of the crucial considerations when choosing a stock is the free float. Institutional investors are usually interested in a small free float. This is due to the higher volatility of a large float compared to a small float.
A key distinction between a free-float market cap and a market cap is that the total number of outstanding shares is taken into consideration by the overall market cap. In contrast, not all shares made accessible to the public for trading are taken into account in the free-floating market cap.
The free float ratio can have two effects on stock prices. If the free float ratio is poor, investors will first steer clear of that business. Second, the lower number of shares on the market as a result of the reduced float ratio may make it difficult for this stock to retain liquidity in the capital markets.
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