Free Float
It accounts for the shares of a company or entity freely traded by the public from the stock exchange and are not held privately by big and influential inside players
What is Free Float?
Free float, or public float, accounts for the shares of a company or entity freely traded by the public from the stock exchange and are not held privately by big and influential inside players. In other words, public float represents the number of publicly traded shares in the secondary market.
A company's free float provides very important information about the company. While free float does influence a company's market capitalization, it's not the only factor.
Market capitalization is calculated by multiplying the total number of outstanding shares by the current market price per share. Free float only represents the portion of outstanding shares that are available for trading in the public market.
This metric for a company helps in the categorization of the companies into small-cap, mid-cap, and large-cap classes. However, free-float market capitalization is a very distinct and vast topic.
Suppose a company has a very minimum number of shares open to public trading. That could mean private and institutional investors hold the majority stake in the company.
People usually get confused between outstanding shares and free-float stocks. To understand all these terms, we need to grasp the distinction between outstanding shares and authorized shares.
In short, outstanding shares are the total number of shares issued in the stock market and are actively held by investors. Authorized shares are the maximum number of shares the company can issue in the secondary market on legal grounds.
Key Takeaways
- Free float, also known as public float, represents the shares of a company that are freely traded on the stock exchange and not privately held by influential insiders.
- Market cap is determined by multiplying a company's publicly traded shares by its current stock price, providing a snapshot of its overall value.
- Free float helps classify companies into small, mid, or large-cap, aiding investors in assessing a company's size and market position.
- Free float is distinct from outstanding shares, focusing solely on shares available for public trading, excluding restricted and closely-held ones.
- High free float suggests better governance and stability, but low free-float companies may pose higher risks, necessitating careful analysis before investment.
Understanding Free Float
We discussed the difference between terms like authorized and outstanding shares, which are connected to free-float shares. Let us look into these terms to gain more clarity about the free float shares.
Authorized shares refer to the number of maximum stocks of a company that could be issued to possible investors legally.
The outstanding shares are the total number of shares issued in the secondary market and are actively held by the investors, be they public or private investors.
Now floating stock or floating shares of a company are an even narrow measure of a company's shares. Under this measure, stocks held by private investors and other closely-held shares by insiders and others are included in the count.
As discussed above, this count of shares is used as a basis for calculating the company's market capitalization by indexes. These are then called free-float market capitalization indexes.
Coming to the question, are shares outstanding and free float the same? As close as they sound, they're not the same, although these two are closely related to the number of shares a public company has issued to public investors.
For better clarification,
- Shares outstanding are a company's stock currently held by all the shareholders, irrespective of whether they are private or public investors.
- Floating stocks or floating shares are the ones that are only held by public investors in the secondary market and are still available in the market.
Example of Free Float
Let us take a real-life example of an Indian company, Nykaa. It is an e-commerce company founded by Falguni Nayar in the year 2012. Its headquarters are located in Mumbai, Maharashtra.
It has around 2.85 billion outstanding shares and 818.61 million as float shares in the market. This means that roughly 28.72% of its outstanding shares are currently held by public investors and are available in the secondary market.
It is calculated by taking the number of issued and outstanding shares minus any restricted stock which may not be publicly traded.
Free Float = Outstanding Shares - Restricted Shares - Closely-held Shares
Importance of Free Float for Investors
This metric is an important measure of a company that the investor is willing to invest in and for the analysts to draw a clearer picture of the company's performance.
As discussed earlier, public float is also used to calculate free-float market capitalization. In Indian markets, many companies have multiplied the wealth of their investors by over ten times due to low public float. This is mainly attributed to the company's low equity and high promoter holding aspect.
Now the question is, can low-free float companies be an attractive investment opportunity? We will answer this question for you in further explanation.
One of the main characteristics of a company with a lower free float is that its shares are not available at low prices. A simple reason is that their prices can increase quickly due to less liquidity than other stocks. It's the same for its fall in price.
Note
It should be kept in mind that all low free-float shares are not good investment prospects. Low free float gives more leverage to the promoters and/or private investors in the company's holdings; hence, they can easily manipulate the stock prices.
As per the historical data, large free-float companies are more stable than those with less public vulnerability.
Thus, companies with high free-float are better at governance since the public investors outweigh the company's promoters, and now shareholders have more power to exert their rights.
Although low free-float companies could be riskier to invest in, not all free-float companies need to be riskier. Thus, one must holistically analyze the company before investing in them.
Analyzing The Free Float of Companies
A company's free float can give many insights into a company’s structure. But, as discussed above, it can also determine if that company's stock is worth investing in.
The float of a company's holdings is calculated by subtracting the locked shares from the company's outstanding shares. A simple example is that a company may have 5 million shares outstanding, including 2 million in the locked-in criteria.
Therefore, the company has a total of 3 million floats.
It is closely looked into by potential investors and analysts as a very crucial metric while picking stocks. It depends on the type of investors whether to invest in a low or a high free-float company.
The lower ones are usually invested in by institutional and wealthy investors, as these stocks are more volatile than the ones with large floats.
Moreover, stocks with low float have a wide bid-ask spread and limited liquidity owing to fewer stocks available for public trading.
In other words, this metric may give investors a more vivid insight into a stock and a company holistically. It will give an idea of how volatile the stock is.
It may also provide information about voting rights and the sense of power that retail investors can hold. The higher the company's float, the higher the voting power residing with the small investors.
One of the main implications of this concept is calculating market capitalization, which helps calculate the index value. In addition, the indices are used as benchmarks to evaluate companies listed on the stock exchanges.
They're based on the market capitalization of the companies that come from the float of that entity.
Thus, the company with the most floating shares has the highest weightage in the indices. And for the companies having a low number of floats have a low weightage in the indices.
Free Float FAQs
No, the floating or floating stocks cannot be higher than the outstanding shares. On the contrary, it is always less than the outstanding shares because it considers all the available shares for trading on the financial exchanges.
Shares outstanding include tradeable shares in the open market and any other restricted shares inside or private investors hold. These make all the shares the company issues in total.
Therefore, the float is always less than the outstanding shares.
Determining whether a company's float is good is based on different perceptions and different purposes for which investors or analysts are calculating it. As a result, some may even pick low-float stocks, and others can also go for high-float stocks.
The difference between the market cap and float market cap is no-frills. The float market cap assumes all the outstanding shares of the company. At the same time, the float market cap comprises only the floating shares of the company. Indexes around the world have well accepted this methodology.
It is the worth of the product of the current price of the shares available in the market and the number of shares available for trading in the open market.
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