Market capitalization is a valuable parameter that many investors consider when holding money in a company. Most investors stay indoors and see free-float market capitalization as it provides better insight into the quality of holding. What it means and why it is crucial:
What is the market capitalization of a company?
Market capitalization is the outstanding number of shares of a company multiplied by its current market price. For example, if a firm has 1 lakh outstanding shares and the share price is Rs 10, then the market capitalization of the company is Rs 10 lakh.
What is a free-float market capitalization?
The firm’s value is calculated by excluding the owners’ holdings of stock in the free-float market capitalization. All such excluded shares are free float shares. For example, if 10 lakh shares are issued by the company, with the face value of Rs 10, but the promoter owns 4 lakh shares, then the free-float market capitalization will be Rs 60 lakh.
What is the difference between the free-float market capitalization and total market capitalization?
The free-float market capitalization is smaller than the total market capitalization because promoter-owned or locked-in stocks are excluded. For example, Coal India NSE has a total market capitalization of 0.25 percent at Rs 1.8 lakh crore, but the free-float market capitalization is around Rs 35,600 crore due to the government’s high hold.
How does this affect stock trading?
Small free float stocks are likely to see higher price volatility as the share price requires fewer trades. On the other hand, volatility is small in the case of a large free float. The number of individuals buying and selling shares with a large free float is high, so a small volume of trade does not significantly affect the price.
How does the free float method help in index calculation?
Both NSE and BSE have used free-float market capitalization techniques to calculate Nifty and Sensex benchmark scores and assign a stock weight to index. So a high free float firm weights higher indices. A free float index better represents market trends because only those stocks are taken into account for trading. This broadens the index because it helps reduce the concentration of the top few companies.
How is the free-float market capitalization calculated?
A free-float methodology is a technique by which the underlying firms of an index are calculated for market capitalization. The free-float market capitalization approach is calculated by taking the cost of equity and multiplying it by the number of easily accessible shares on the market.
Understand the free-float method: It can also be called float-adjusted capitalization. The free-float technique is seen as a better way to calculate market capitalization, as it provides a more accurate reflection of market movements and stocks that are actively accessible for trading in the market. The resulting market capitalization is lower when a complete technique of market capitalization will result in the use of a free-float method.
Note: Most of the primary sequences in the world have adopted the free-float method. Standard & Poor’s, MSCI and FTSE use it extensively.
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