Definition
Free Float Market Capitalization, often simply referred to as “free float”, is a measure of the overall value of a company’s shares that are available for public trading, excluding shares locked in by promoters, company insiders and government holdings. It is calculated by multiplying the share price by the number of freely traded shares. This measure is important because it provides a more accurate reflection of market liquidity and company valuation, as it only includes shares readily available for trading in the market.
Key Takeaways
- Free Float Market Capitalization refers to the total value of a company’s shares that are readily available for trading in the open market. It excludes locked-in shares held by promoters and government.
- This valuation method provides a better measure of market capitalization because it only considers shares that are available for trading and therefore, accurately reflects the company’s market value.
- Free Float Market Capitalization is commonly used in constructing market indexes because it provides a more accurate and realistic view of a company’s value, its liquidity, and the market’s perception of the stock.
Importance
Free Float Market Capitalization is a decisive term in finance as it reflects the degree of liquidity in the market, assisting in the valuation of a company. It refers to the portion of a company’s outstanding shares that are readily available for trading by the public.
By excluding locked-in shares held by promoters and governments, this measure provides a more accurate representation of a company’s market value. The higher the free float market capitalization, the better the market depth, reducing price manipulation.
Furthermore, indices typically use free float market capitalization for calculating weights of the included companies, which can affect passive investment strategies tied to these indices. Hence, it holds significant importance in financial analyses and decision-making.
Explanation
Free Float Market Capitalization, often simply referred to as ‘free float,’ serves a critical purpose in the financial world by providing a metric that accurately represents a company’s market liquidity. The primary purpose is to give investors, analysts and financial institutions an accurate picture of the shares that are readily available for trading in the open market. This information is crucial as it directly influences the supply and demand dynamics, stock price volatility, and the ease at which investors can buy or sell shares without significantly impacting the stock price.
It does not include closely-held shares by insiders and promoters because these shares are not usually transferred in the normal course of trade. Additionally, Free Float Market Capitalization is instrumental in constructing market indexes such as the S&P 500, the FTSE 100, and many others. Index providers predominantly use the free float method in their calculations, and it determines a company’s weightage in the index.
The weightage of a company influences the movement and performance of the index. As a result, free float market cap is used to ensure fair and appropriate representation of the company’s size and its influence over the index movement. It is not just indicative of a company’s size but also represents the proportion of a company’s equity that can generate an active market reaction.
Examples of Free Float Market Capitalization
Tesla Inc.: Tesla, being one of the most valuable and traded auto companies listed on the NASDAQ stock exchange, serves as an example of free-float market capitalization. As of November 2021, Tesla’s free-float market cap was approximately $04 trillion, reflecting the value of all the outstanding shares that are available for general public trading.
Apple Inc.: Apple is another typical example of a company with substantial free-float market cap. Owing to its large market presence and investor interest, a significant portion of Apple’s shares are held by general public shareholders, thus, contributing to its free-float market cap. As of November 2021, Apple’s free-float market cap was about $48 trillion.
Microsoft Corporation: Microsoft, being one of the world’s leading technology companies, has a high free-float market cap because a majority of its shares are available for trading in the market. As of November 2021, Microsoft had a free-float market cap of around $25 trillion.It’s essential to note that these values can change due to various factors such as stock splits, share buybacks, and changes in share prices.
FAQ: Free Float Market Capitalization
Q1: What is Free Float Market Capitalization?
Free Float Market Capitalization is a measure of the market value of a company’s outstanding shares that are available to the public for trading. It’s calculated by multiplying the company’s share price by the number of shares available to the public, excluding locked-in shares held by promoters and governments.
Q2: How is Free Float Market Capitalization different from Total Market Capitalization?
Total Market Capitalization is the value of all of a company’s shares, while Free Float Market Capitalization only considers those shares freely available for trading in the market. It excludes promoter-held shares, government holdings, and other locked-in shares that cannot be sold in the open market.
Q3: Why is the Free Float Market Capitalization important?
Free Float Market Capitalization provides a more realistic value that a company can be bought or sold for on the open market. It also impacts index calculation, and most stock indices are free-float adjusted, which means valuations are based on the shares freely available for trading.
Q4: How is the Free Float Market Capitalization calculated?
Free Float Market Capitalization is calculated by multiplying the company’s share price by the number of shares freely available to the public. This does not include shares locked in by promoters, governments, or other entities.
Related Entrepreneurship Terms
- Outstanding Shares: These are the shares of a company, which are issued and purchased by investors and can be transferred or sold freely in the market.
- Restricted Stock: This refers to shares of stock that are not fully transferable until certain conditions, such as time or performance milestones, have been met.
- Publicly-Listed Companies: These are companies that have their securities traded on a stock exchange. It is one of several ways for a company to go public and make their shares available to investors.
- Stock Market Index: A measurement of a section of the stock market, or a composite value produced by combining several stocks or other investment vehicles together and expressing their total values against a base value from a specific date. Free float market capitalization is a common way of measuring stock index.
- Market Cap Weighting: This is a type of equity index in which each component is weighted according to its total market capitalization. The larger components carry a higher percentage weight, and the smallest components have the smallest weights.
Sources for More Information
- Investopedia: A comprehensive source for finance and investing definitions, offering detailed articles on specific terms like Free Float Market Capitalization.
- NASDAQ: The NASDAQ website provides both market news and educational articles about many financial topics, including market capitalization.
- Bloomberg: A leading provider in global business and financial information, providing news, analytics and insights.
- Reuters: An international news organization, producing finance and business articles from around the globe.
