Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Free-Float-Adjusted Market Capitalization ====== 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. ===== Why Bother with Free-Float? ===== 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. ==== A More Realistic Picture ==== 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. ==== The Foundation of Modern Indices ==== 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]]. ===== How Is It Calculated? ===== The calculation is straightforward once you know which shares to count. ==== The Formula ==== 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. ==== What is NOT a Freely Floating Share? ==== 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: * **Insider Holdings:** Shares held by founders, executives, directors, and their families. * **Government Holdings:** Shares owned by local or national governments, often for strategic reasons. * **Corporate Cross-Holdings:** Large blocks of shares held by another public company as part of a strategic alliance. * **Restricted Stock:** Shares that cannot be sold for a certain period, such as those issued to employees or after an [[Initial Public Offering (IPO)]]. ===== A Simple Example ===== Let's look at "InvestoCorp," a fictional company. - Total Shares Outstanding: 200 million - Current Share Price: $50 - **Standard Market Cap:** $50 x 200 million = **$10 billion** Now, let's find the locked-up shares: - Held by the founding family: 40 million shares - Held by a government sovereign wealth fund: 20 million shares - Total Locked-Up Shares: 60 million So, the number of freely floating shares is: - 200 million (Total) - 60 million (Locked-Up) = 140 million shares And the Free-Float-Adjusted Market Cap is: - **Free-Float Market Cap:** $50 x 140 million = **$7 billion** As you can see, the publicly tradable value ($7 billion) is significantly different from the headline value ($10 billion). ===== The Value Investor's Takeaway ===== For a [[Value Investor]], understanding the nuances of a company's ownership structure is key. The free-float market cap offers several practical insights: * **True Market Weight:** It provides a better measure of a company's size and influence from the public's point of view, helping you avoid being misled by inflated headline numbers. * **Assessing Liquidity and Risk:** A very low free float (a small percentage of total shares available to trade) can be a red flag. It may lead to lower trading volume and higher price swings, increasing risk. * **Understanding Index Funds:** If you invest in passive funds that track an index, knowing that they are built using free-float-adjusted values helps you understand exactly what you own and why certain companies have a larger or smaller weight in your fund. It confirms that your fund is tracking the investable market, not a theoretical one.