Have you ever wondered why two companies with the same market value can perform so differently in the stock market? The secret lies in something called free float market capitalisation. It’s a simple yet important way to understand how much of a company’s shares are available for public trading.
This blog will explain free-float market capitalisation in easy terms, how it is calculated, and why it matters. Keep reading if you are curious about how it impacts investments and stock prices.
Market capitalisation or market cap is a way to measure the total value of a company. It is calculated by multiplying the current share price by the total number of shares outstanding. For example, if a company has 1 crore shares at ₹100 each, its market capitalisation will be ₹100 crore. This is a starting point for understanding the size of a company, whether it’s a small-cap, mid-cap or large-cap company.
Free float market capitalisation is the total value of a company’s shares that are available for trading in the market. It does not include shares held by insiders, promoters, government organisations or institutions as these shares are locked and not traded freely. It only includes shares that the general public can buy or sell. Hence, it is a key metric to understand the liquidity of a company’s stock.
It is important because it gives investors a better understanding of how much of a company’s stock is actively traded. Companies with higher free float capitalisation have stable and less volatile stock prices as more shares are available for trading. Companies with low free float can have sharper price movements as fewer shares are available in the market.
Imagine a company that has 10 crore shares. Promoters hold 4 crore shares and cannot be traded. The remaining 6 crore shares are available for public trading. In this case, free float capitalisation will be calculated on 6 crore publicly available shares, not 10 crore shares.
It is calculated by considering the shares that are available for public trading. This excludes shares held by promoters, government entities or institutions that are not available for everyday market transactions.
Free Float Market Cap = (Total Outstanding Shares – Shares Not Available for Public Trading) × Current Market Price of a Share
Here’s a breakdown of the terms:
This formula highlights the importance of excluding locked-in shares when determining the value of shares actively traded in the market.
Let’s compare two companies to understand why similar market capitalisations can lead to different trading behaviours.
ABC Ltd. has 1,00,000 outstanding shares, and each share is priced at ₹50. Out of the 1,00,000 shares, promoters hold 40,000 shares, leaving 60,000 shares available for public trading.
XYZ Ltd. also has 1,00,000 outstanding shares priced at ₹50. However, promoters hold only 20,000 shares in XYZ Ltd., leaving 80,000 shares available for public trading.
Here’s how we calculate for both companies:
For ABC Ltd.:
For XYZ Ltd.:
Conclusion from the Example:
Although both ABC Ltd. and XYZ Ltd. have the same total market capitalisation of ₹50,00,000, their free float market capitalisations differ significantly. ABC Ltd. has a free float market cap of ₹30,00,000, while XYZ Ltd. has ₹40,00,000. This difference means XYZ Ltd. has more shares available for public trading, offering better liquidity and stability compared to ABC Ltd., which might face higher volatility due to its lower free float.
The free-float factor represents the proportion of a company’s shares available for public trading compared to its total outstanding shares. It helps investors and analysts assess the percentage of shares actively traded in the market.
How to Calculate Free-Float Factor
The formula is: Free-Float Factor = Shares Available for Trading ÷ Total Outstanding Shares
Example:
A company has 35,000 total shares, out of which 26,000 are open for public trading. Using the formula:
Free−FloatFactor= 26,000÷35,000= 0.74
This means 74% of the company’s shares are publicly tradable.
How It Impacts Free Float Market Capitalisation
To calculate free-float market capitalisation with the free-float factor, the value is adjusted by multiplying the total market cap with the factor. For example:
AdjustedFree−FloatMarketCap= ₹13,78,000×0.74= ₹10,19,720
This adjustment gives a clearer view of the value of shares truly available for trading, making it a critical metric for market analysis.
Free float and total market cap are two measures of a company’s value but they are very different. The total market cap is calculated by multiplying the total number of outstanding shares by the current market price of each share. It includes all shares issued by the company, public, promoters or institutions hold them. Free float market cap on the other hand is only for the shares available for public trading, excluding those held by insiders, government entities or large investors who are not actively trading.
Total market cap is a broader measure of a company’s size while free float market cap gives a better picture of the company’s liquidity and trading activity in the stock market. For example, a company with high promoter holdings might have a large total market cap. However, its float market cap could be much lower because of the limited shares available for public trading.
It is an important factor in determining the weight of a company in Nifty and Sensex. These indices use free float market cap and not total market capitalisation to ensure companies are represented fairly based on the shares available for public trading. This way companies with large insider or government holdings don’t dominate the index and the index reflects the actual market activity. This helps investors track the performance of liquid and actively traded stocks; hence, the indices are more useful for investment decisions.
Market capitalisation is calculated by multiplying a company’s total number of outstanding shares by the current market price of a single share. The formula is:
Market Cap = Total Outstanding Shares × Current Share Price.
For example, if a company has 1,00,000 outstanding shares priced at ₹50 each, the market cap is ₹50,00,000. This metric is a simple way to measure a company's overall size and value in the stock market.
Free float and market volatility are linked. A low free float means the limited supply of shares magnifies the impact of buying or selling. This makes low free float stocks prone to price manipulation or wild swings. High free float stocks are less volatile as the larger number of shares available to trade reduces the impact of individual trades on the stock price. Knowing this helps you to gauge the risk and stability of stocks.
Free float market capitalisation is a key metric that focuses on the shares available for public trading and helps investors to understand the company’s liquidity and risk profile. It gives a clearer picture of stock volatility and is used widely in index weightings like Nifty and Sensex. By distinguishing free-float market cap from total market capitalisation, investors can make informed decisions based on the stock’s actual trading.
Free float market capitalisation refers to the value of a company’s shares that are actively available for public trading. It excludes shares held by promoters, government bodies, or institutions.
Free float market cap only considers publicly tradable shares, while total market cap includes all outstanding shares, even those held by insiders or locked in. Free float is a better measure of market liquidity.
Low free float market cap can lead to higher stock volatility, making the stock risky. However, it can offer high returns in a bull market but comes with increased price manipulation risks.
Free float affects volatility because fewer shares in the market make the stock sensitive to demand and supply changes. Lower free float leads to higher price swings, while higher free float provides stability.
You can find free float data on platforms like NSE (National Stock Exchange) and stockbrokers such as Lakshmishree Broking.
Disclaimer: This article is intended for educational purposes only. Please note that the data related to the mentioned companies may change over time. The securities referenced are provided as examples and should not be considered as recommendations.
