Free-Float-Adjusted Market Capitalization (also known as 'Free-Float Market Cap') is a method of calculating a company's size that only considers the shares available for public trading on the open market. Think of it as a more realistic version of the standard Market Capitalization. While the standard calculation multiplies the current share price by the total number of outstanding shares, the free-float method excludes shares that are “locked up” and not readily available for buying or selling. These locked-up shares typically include those held by company insiders (like founders and executives), governments, or other corporations. By filtering out these restricted shares, the free-float market cap provides a much better picture of a company's actual weight and influence in the stock market from the perspective of a public investor.
You might wonder why we need this extra step. Isn't a company's total value what matters? Well, for an investor, understanding the tradable value is often more important. The free-float adjustment gives a truer sense of a stock's Liquidity and how supply and demand dynamics might play out in the market.
Imagine a giant pizza representing all of a company's shares. The standard market cap tells you the value of the entire pizza. However, the founder has already claimed three slices, and a strategic partner has dibs on two more. None of them are selling. The free-float market cap tells you the value of only the slices left in the box that you and other public investors can actually buy. A company might have a massive headline market cap, but if only a small fraction of its shares are available to trade (a small Free Float), its stock price can be more susceptible to Volatility as small trades can have a larger impact.
This isn't just an academic exercise. Most major stock market indices, like the S&P 500, Dow Jones U.S. Total Stock Market Index, and MSCI World Index, use the free-float-adjusted market capitalization to determine which companies to include and how much weight each company should have. They do this to ensure the index accurately reflects the investment opportunities actually available to the public. If they used the standard market cap, indices would be distorted by companies with large, non-tradable blocks of shares, making them a poor benchmark for your portfolio or the basis for an Index Fund or ETF.
The calculation is straightforward once you know which shares to count.
The formula is simple: Free-Float-Adjusted Market Cap = Current Share Price x Number of Freely Floating Shares The tricky part isn't the math; it's correctly identifying the “freely floating” shares.
To find the number of free-float shares, you start with the total number of outstanding shares and subtract all the restricted, or “locked-up,” shares. These typically include:
Let's look at “InvestoCorp,” a fictional company.
Now, let's find the locked-up shares:
So, the number of freely floating shares is:
And the Free-Float-Adjusted Market Cap is:
As you can see, the publicly tradable value ($7 billion) is significantly different from the headline value ($10 billion).
For a Value Investor, understanding the nuances of a company's ownership structure is key. The free-float market cap offers several practical insights: