If a business has free float market capitalization, its value is based only on the shares that are owned by the public. This means that only tradable shares are counted. Some shares are limited or owned by a small group of people, so this number does not include all of them.
A. A brief explanation of market capitalization
The free-float approach is a way to figure out how much money the companies that make up a stock market index are worth on the market. The free-float method figures out a company’s market value by increasing its price by the number of shares that are readily available on the market.
B. The importance of market cap in investment decisions
Free-floating shares are needed to make the market more open and get more buyers involved. It helps make a company’s products more usable right away. Investors are drawn to a company’s stock when it is liquid, which helps keep the market running smoothly. Because such assets can be traded easily, buyers can quickly get out of the market if they lose money.
There is also less chance that the price will change if there are a lot of free-floating shares. Because of this, the share price can’t go back up right away.
II. Understanding free float market cap
Free-float market capitalization is a limited way to figure out how much a company is worth right now. Some of a company’s share capital is given to its founders, directors, social trusts, and other groups. Because this share capital isn’t open to the public, it doesn’t trade on the stock market. There is a certain amount of share capital that anyone can sell on the stock market. This is called a free-float market capitalization.
A. Definition and explanation of free float market cap
Market capitalization is the number of shares that a company has out there divided by the price of each share. A company can be put into one of three groups based on its market capitalization: small-cap, mid-cap, and large-cap. Free-float market capitalization, on the other hand, is an entirely different idea.
B. Differentiating free float market cap from total market cap
Under standard market capitalization, the number of existing shares, which includes both publicly and personally owned shares, is counted. The free-float market capitalization method, on the other hand, only looks at the number of publicly owned shares to figure out how much a company is worth.
C. Significance in evaluating a company’s actual value
The free-float method is an excellent way to find out what a company is really worth on the market because it only counts shares that are easily traded. From the shares that regular people own, investors can get a fair idea about how much a company is worth on the market.
III. Calculation of free float market cap
Market cap, also written as market capitalization, is found by multiplying the number of existing shares of a company by the price of those shares. A stock with a high float is thought to be safe and has a lot of big buyers. For people who want to spend with less danger, it shows that they have the financial security they need. A low float means that there is less economic security and a more significant risk.
A. Explanation of the formula
For free float, use the formula:
Free Float = Outstanding Shares – Restricted Shares – Closely Held Shares
For free-float-adjusted market capitalization, use the formula:
Market Capitalization with Free Float = (Total Outstanding Shares –- Restricted Shares) x Market Price of Shares
B. Examples to illustrate the calculation process
Let’s say that stock ABC is worth Rs 100 and has a total of 125,000 shares. That being said, 25,000 of these shares are locked in, which means that big investors and the company’s management have them, so they can’t be traded. ABC’s market value is 100 multiplied by 100,000, which is the total number of shares that can be traded. That is Rs 10 million. Here are the top companies in India by market capitalization as of 20 September 2024:
| Company Name | Last Price | % Change | 52 wk High | 52 wk Low | Market Cap (Rs. cr) |
| Reliance | 2,977.00 | 1.28 | 3,217.60 | 2,220.30 | 2,014,244.24 |
| TCS | 4,272.50 | -0.55 | 4,592.25 | 3,311.00 | 1,545,827.89 |
| HDFC Bank | 1,740.90 | 1.90 | 1,794.00 | 1,363.55 | 1,328,070.70 |
| Bharti Airtel | 1,691.90 | 1.62 | 1,711.70 | 895.45 | 979,817.59 |
| ICICI Bank | 1,313.35 | 1.65 | 1,317.80 | 899.00 | 925,275.42 |
IV. Advantages of using free float market cap
Finding the free float market capitalization is helpful for investors because it helps them figure out how much a company is really worth. Investors learn about the shares that can be bought and sold on the market so that they can carry out their buying plans. By leaving out the shares owned by the founders, it gives a better picture of the company. So, the actual price is shown by the stocks and ETFs, which give buyers a clear picture of where the company stands.
A. Reflecting the actual market value
Free float market capitalization only considers shares that are accessible for trading on the stock market, as opposed to total market capitalization, which takes into account shares that are locked in and shares that are openly traded. Free float thus gives us a more realistic picture of the actual worth of a firm.
B. Impact on investment strategies
A company’s free-float market cap tells you how much of its total share capital can be bought and sold by anyone. Investors and buyers can use this information to figure out how liquid, volatile, and concentrated large-cap, mid-cap, and small-cap companies are.
C. Avoiding distortions caused by locked-in shares
Traders usually choose to deal with shares from companies with higher free-float levels because it makes trading more accessible and doesn’t cause significant changes in market prices. Traders can freely buy and sell shares as long as there is enough supply and demand. This helps keep the market open and stable.
V. Real-world applications
Coal India’s total market value is Rs 91,608.96 crore, but its free-float market value is only Rs 31,168 crore. This is because the government owns a considerable amount of the company. In the real world, Axis Bank Ltd. has a total market value of 1.3 lakh crore and a free-float market value of 1.08 lakh crore as of 17 April 2020.
A. How investors can use free float market cap in their analysis
Market capitalization is a way for investors to figure out how big a company is. People think that investing in large-cap companies (those with a market cap of over ₹28,000 crore) is safer and more stable. These businesses have been around for a while and have a history of steady performance. They also usually make regular payments. Reliance Industries and TCS are two examples.
B. Case studies showcasing successful investment decisions using this metric
There are 50,000 shares in Mehta Textiles, and each one is worth Rs 28. Out of these, the state owns 27,000 shares, and 23,000 are personally owned. It’s easy to figure out both the market cap and the free-float market capitalization from this information.
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VI. Limitations and considerations
In free-float, only shares owned by the public are taken into account. Shares owned by investors, insiders, or the government are not taken into account. There is a lot of trading in free-float shares on the open market, and they are easy to get when a company offers them.
A. Factors to be aware of when relying on free float market cap
It takes a company’s total market capitalization and changes it by a certain number to get its free-float market capitalization. You can think of 0.5 as the free-float factor. This means that only 55% of the company’s market value will be used for the calculation.
B. Potential drawbacks and risks
The danger or possibility that the prices of assets will change is called market volatility, and it is negatively related to the amount of free float. The market is more solid when there is a giant free float, which means that buyers are busy buying and selling shares without having a significant effect on prices. On the other hand, more minor free-float levels mean more instability since there are fewer shares available, which can make price changes more noticeable.
VII. Conclusion
Free float market capitalization works by finding shares that are owned by the public to figure out how much a company is worth on the market. It is easy for investors to find the products that are actually offered for trade. By looking at how volatile the market is, they can make intelligent decisions and manage the variables to shape their investments. Investors need to know how much a company is really worth and how big it is compared to other companies. The market price is essential for this.
FAQs
1. What is a free floating market?
The free-float market capitalization is a way to figure out how many shares of a business are actually out there for the public to buy. The free-float factor is used to figure out a company’s free-float market value. Traders pay close attention to a stock’s free float, which is a critical factor in choosing stocks.
2. What is full market capitalization?
The market value of all of a company’s shares, both public and private, is called its total market capitalization. This includes stock that has yet to be used and is locked in. That’s why total market capitalization is sometimes written as full market capitalization.
3. What is the free-float factor of Nifty?
Based on the market value of all stocks traded on the NSE as of 29 September 2023, the Nifty 50 Index makes up about 59% of that value. For the six months ending in September 2023, the total traded value of the stocks that make up the Nifty 50 index was about 34.6% of the total traded value of all stocks on the NSE.
4. What is free-float in the stock exchange?
The term free float, which is sometimes used to refer to public float, describes a company’s shares that are not limited and may be exchanged openly. For example, the term refers to the number of shares that can be bought and sold by anyone on the secondary market.
