What is Free Float and Weighted Market Capitalisation?

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Equirus Wealth

12 Apr 2023 4 min read

Investment#Finance

There are many ways to calculate and measure the size of any company. Before investing, investors frequently consider a company's market capitalization. One kind of market capitalization is the free float style, which is gaining quite a popularity nowadays with investors since it gives a better insight into the holding per se of any company.

What is meant by “Market Capitalisation”?

Market capitalization is a company's outstanding shares that are multiplied by its current market price. For instance, if company XYZ has 10000 outstanding shares priced at Rs. 30 each, then the market capitalization of XYZ will be Rs. 300000. Further, based on the companies' size, they are classified as either large-cap, multi-cap, mid-cap, or even small-cap and micro-cap companies.

What exactly is the concept of “free float” in market capitalization?

A free float is a method of calculating the market capitalization of a stock market's underlying companies. In this method, the equity prices are multiplied by the number of readily available shares in the market to calculate the market capitalization. In the case of free-float market capitalization, only the active shares are taken, excluding the locked-in shares that insiders, promoters, and the government generally hold.

The free-float method provides a better and more accurate reflection of the market movements and the stocks readily available for trading. In addition, in the case of a free-float market capitalization, the resulting marketing capitalization is generally smaller than what can result from a total market capitalization method.

How to calculate the market cap using a free-float method?

Given below is the simple calculation formula for a market capitalization using a free-float method:

FFM = Share Price * (Number of Shares issues - locked in shares) or

FFM = Share Price * Number of public shares

Example of a free-float market capitalization

Here is an example to understand the free-float method and how to use its formula.

ABC industry has 20000 outstanding shares, which are for Rs.25 each. Of these 20000, 12000 shares are public, and the remaining 8000 are private. Therefore, the above example makes calculating market capitalization and free-float market capitalization easy.

The market capitalization will be:

20000 * 25 = Rs. 500,000

The free-float market capitalization will be:

12000 * 25 = Rs. 300,000

What is weighted average market capitalization?

The weighted average market capitalization is a type of stock market index construction based on the market capitalization of the index's constituent stocks. Big companies would eventually account for more of an index than smaller stocks.

How to calculate weighted market capitalization?

The simple way of calculating the weighted average market capitalization is by multiplying the current market price by the number of outstanding shares and then taking an average to determine the weight.

Price-weighted vs Market capitalization weighted

In a market scenario, indexes are weighted through the Price or the market capitalization method. And in both cases, the returns are weighted based on the individual stock's weighing types. Market capitalization weighting is the most common of both.

Price-weighted indexes compute an index's returns by dividing its stock returns by their current market prices. Through a price-weighing method, the higher-priced stocks will receive a higher weight, ultimately influencing the return on the index. The type of weighting methodology used by an index would eventually affect its overall returns.

Implications of a free-float market capitalization

Indian bourses, such as National Stock Exchange and Bombay Stock Exchange, use the free-float market capitalization methods to calculate the index values. It is the sum of all its listed entities' free-float market capitalization sizes.

Difference between Market capitalization and Free Float

The primary difference between market capitalization and free-float market capitalization is as below:

The market capitalization of a corporation represents the value of all its stock shares, whereas a free float is the number of publicly available shares for trading. Therefore, a free float is considered one of the essential elements during the picking of a stock.

Quick Wrap Up

Most of the stock exchanges worldwide use the free float market capitalization method. It helps them to eliminate the impact of the private or the locked-up shares reflected in the market. Moreover, a free-float market capitalization is inversely proportional to the volatility in the market. Therefore, a higher free-float value suggests that investors are trading shares quickly. Similarly to this, a low free float signals greater volatility.

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