A free-float methodology is a method by which the market capitalization of underlying companies of an index is calculated. Free-float methodology Market capitalization is calculated by taking the price of equity and multiplying it by the number of readily available shares in the market. With the full-market capitalization method, instead of using all of the active and passive shares, the free-float process excludes lock-in shares such as those held by insiders, promoters, and governments.
Free float is not the number of shares issued in the public market. Multiply this with market value and you have free-float market capitalization. Promoters usually control their stake (> = 51%). There may be other large investors who hold some stake with themselves and the one who remains is available to the public as a free float. These shares traded on the exchange and important in determining the market values of a company, depending on how retail, as well as institutional investors, value the stock. It often serves as a benchmark when a company decides to issues rights shares or during an FPO (Follow-on public offer). It also serves as a benchmark for OTC block deals that occur between large investors, although the price at which these transactions occur also affects short-term free float stock prices.
The total value of the company in the stock market is typical; this is a calculation by multiplying the outstanding shares by the current share price. That is the free-float market capitalization of the market. I think if it is free-float capitalization, then we have to mention the free-float factor.
Companies disclose stock holding details on the exchange, which contains how many shares. Based on this, the exchange determines the free-float factor. You have to multiply this factor to get a free-float market cap.
Free-float method calculation method
The free-float function is calculated as follows:
FFM = share price x (number of shares issued – locked-in shares)
Let’s we understand by an example-
Suppose a company called ABC Corporation is a listed entity with 10 million (1 crore) equity shares.
Six million of which are related to the concerns of promoters and the group, which will not come for business or it firmly placed in stock.
The balance of 4 million is technically available to buy or sell; now the current market price of the shares of the company is 100:
Then the free-float market capitalization is 4 million shares * 100 each.
Learn the Free-float Methodology
Free-float capitalization can also be called float-adjusted capitalization. The free-float method is regarded as a good way of calculating market capitalization, as it gives a more perfect reflection of market movements and stocks for trading in the market. When using the free-float method, the resulting market capitalization will be smaller than the result with a full market capitalization method. Most significant sequences in the world have adopted the free-float method.
So free float is the shares that issued to the public and only these shares change hands, so they are called free float shares and if you multiply it by the price of one stock, it becomes free-float market capitalization.