Free Floating Market Capitalization

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    Free floating average market capitalization refers to the average market value of a company’s shares that are available for public trading, excluding shares held by insiders, promoters, and other restricted shareholders.

    Example

    Let’s use a real-life example of a well-known company to illustrate the concept of free float market capitalization. We’ll use Apple Inc. (AAPL) for this example, using approximate figures for simplicity.

    As of November 2023:

    1. Total Outstanding Shares: Approximately 15.7 billion
    2. Current Stock Price: Let’s say $180 per share (this fluctuates daily)
    3. Insider and Restricted Holdings: About 0.06% (very low for Apple)
    Step 1: Calculate Total Market Capitalization

          Total Market Cap = Total Outstanding Shares × Current Stock Price
         = 15.7 billion × $180 = $2.826 trillion
    Step 2: Calculate Free Float Shares

             Free Float Shares = Total Outstanding Shares - Restricted Shares
             =  15.7 billion - (15.7 billion × 0.06%)
             = 15.7 billion - 0.00942 billion
             ≈ 15.69 billion shares
    Step 3: Calculate Free Float Market Capitalization
          
         Free Float Market Cap = Free Float Shares × Current Stock Price
        = 15.69 billion × $180 ≈ $2.824 trillion

    In Apple’s case, the difference between total market cap and free float market cap is minimal due to its very low insider ownership. This is why Apple has such a significant weight in many market-cap-weighted indexes.

    Now, let’s contrast this with a company that has higher insider ownership, like Tesla (TSLA):

    1. Total Outstanding Shares: Approximately 3.2 billion
    2. Current Stock Price: Let’s say $240 per share
    3. Insider and Restricted Holdings: About 22% (much higher than Apple)

    Total Market Cap = 3.2 billion × $240 = $768 billion

    Free Float Shares = 3.2 billion – (3.2 billion × 22%) = 2.496 billion

    Free Float Market Cap = 2.496 billion × $240 = $599.04 billion

    In Tesla’s case, the free float market cap is significantly lower than the total market cap due to higher insider ownership. This difference affects Tesla’s weight in market indexes and can impact its stock’s liquidity and volatility.

    These examples demonstrate how free float market capitalization can vary significantly between companies and why it’s an important metric for investors and index providers.

    Here are the key points about free floating average market capitalization:

    Calculation

    Free Float Average Market Cap = Average (Daily Free Float Market Cap over a period)

Where Daily Free Float Market Cap = Number of Free Float Shares * Daily Closing Price

    Free Float Shares

    These are shares available for trading by the general public, excluding locked-in shares held by promoters, government, strategic investors, etc.

    Purpose

    It provides a more accurate representation of a company’s tradable value in the market compared to total market capitalization.

    Index Weighting

    Many stock market indices use free float average market capitalization for weighting stocks in the index, as it better reflects the actual investable opportunity.

    Liquidity Indicator

     A higher free float average market cap generally indicates better liquidity and easier tradability of the stock.

    Time Period

    The average is typically calculated over periods like 3 months, 6 months, or 1 year, depending on the specific use case or index methodology.

    Dynamic Nature

    It changes regularly based on market price movements and any changes in the free float factor of the company.

    Investor Focus

    Institutional investors often prefer stocks with higher free float average market caps due to better liquidity and lower impact costs.

    Regulatory Reporting

    Many stock exchanges require companies to report their free float periodically, which is used to calculate this metric.

    Citations

    For further study, refer below:


    [1] https://www.investopedia.com/terms/f/freefloatmethodology.asp
    [2] https://wealthdesk.in/blog/free-float-market-capitalisation/
    [3] https://groww.in/p/free-float-market-capitalisation
    [4] https://www.wallstreetmojo.com/free-float-market-capitalization/

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