Free-Float

Free-Float (also known as 'public float') refers to the number of a company's shares that are available for trading on the open market. Think of it as the portion of a company that is truly in the hands of the general public, rather than being locked up by insiders or major strategic holders. These “locked-up” shares, often called Restricted Shares, are held by individuals or groups with a long-term interest in the company, such as corporate executives, founding families, governments, or other corporations. Because these shares are not actively traded, they are excluded from the free-float calculation. For example, if a company has 100 million total shares, but its CEO owns 20 million and a parent company owns another 30 million, only the remaining 50 million shares constitute the free-float. This metric is crucial because it provides a more accurate picture of a stock's actual liquidity and can significantly influence its behavior in the market. A stock with a small free-float might be more volatile, as a single large trade can have an outsized impact on its price.

At first glance, free-float might seem like a technical detail, but it has very real consequences for investors. Understanding it helps you gauge a stock's market dynamics and potential risks.

A company's free-float is a primary indicator of its stock's liquidity.

• High Free-Float: A large number of shares available for public trading generally means higher liquidity. It's easier for investors to buy and sell shares without dramatically affecting the stock price. This is typical of large, well-established companies.
• Low Free-Float: A small free-float, often called a “thin float,” means fewer shares are changing hands. This can lead to higher volatility, where even modest buy or sell orders can cause sharp price swings. It can also result in a wider bid-ask spread, making trades more expensive.

Major stock market index providers, such as MSCI and S&P, don't use a company's total market capitalization to determine its weight in an index. Instead, they use the free-float adjusted market capitalization. This means a company with a huge market cap but a very low free-float will have a much smaller weighting in an index fund or ETF than you might expect. This is important because billions of dollars in passive investment funds automatically track these indices. A company's inclusion or weighting in a major index directly impacts the demand for its stock.

The calculation is straightforward and helps you see behind the curtain of a company's ownership structure.

The formula is simply the total number of shares minus the shares that are not readily available for trading. Free-Float Shares = Total Outstanding Shares - Restricted Shares Restricted Shares typically include:

• Shares held by company insiders (execs, directors).
• Shares held by founders and their families.
• Large blocks of shares held by other companies (strategic cross-holdings).
• Shares held by government entities.

Let's imagine a fictional company, “EuroAuto AG.”

• Total Outstanding Shares: 200 million
• Shares held by the founding family: 60 million
• Shares held by a strategic partner (another carmaker): 30 million
• Shares held by the government: 10 million

The calculation would be: 200m - 60m - 30m - 10m = 100 million free-float shares. To express this as a percentage: (100 million / 200 million) x 100 = 50% free-float.

For a value investor, free-float isn't just a number; it's a clue about a company's governance and ownership quality. It’s not about whether a high or low float is “good” or “bad,” but about why the float is what it is.

• A low free-float can be a powerful positive signal. If a company is founder-led and the founder retains a massive stake, it shows immense “skin in the game.” This suggests the interests of the most important shareholder—the founder—are aligned with long-term value creation for all shareholders. Think of legendary investors like Warren Buffett, who love to see owner-operators with a deep, personal stake in their business. However, a low float can also be a red flag if control is concentrated in the hands of a group that might prioritize its own interests over those of minority shareholders.
• A high free-float indicates strong liquidity and a broad ownership base, which reduces the risk of price manipulation by a single entity. However, it might also suggest that the founders or initial insiders have cashed out, potentially signaling a lack of confidence in the company's long-term future.

Ultimately, free-float is a diagnostic tool. It prompts you to ask the right questions: Who owns the restricted shares? Are they smart, long-term capitalists or a private equity firm looking for a quick flip? Understanding the story behind the free-float number is a key step in separating a wonderful business from a potential value trap.