Free float market capitalization calculates the company’s market capitalization after considering only those shares of a company that are actively traded in the open market and are not held by the promoters or locked-in shares. Free shares that the company issues are readily available and are actively exchanged in the market.

These shares exclude the following shareholders but are not limited to: –

• Shareholding by promoters/founders/partners/directors
• Controlling interest
• Shares held by private equity funds/hedge funds or any other fund
• Locked-In shares pledged to debt borrowers 
• Equity held by cross-holdings
• Equity held by various trusts which are not actively traded
• Any additional locked-in shares which are not actively traded in the securities market.

The method is also known as float-adjusted capitalization. Under this method, the resulting market capitalization will always be lesser than the full capitalization method. The world’s major indexes have widely adopted the free-float methodology. The famous indexes which currently use the free-float method are S&P, FTSE, and MCI index.

• What is Market Capitalization?
• What is the Difference Between Market Capitalization and Free Float?
• What is the Meaning of Free Float Shares?
• What is a Good Free Float Percentage?
• How is Free Float Value Calculated?
• What Is a Company’s Float?
• What is the Difference Between Free Float and Shares Outstanding?
• Who Owns Free Float?
• How do you Tell if a Stock is Getting Shorted?

What is Market Capitalization?

The free float is a measure of the stocks of a company that are actually available in the market for public to buy and sell. Generally, the shares held by the promoters are not available for the public to trade in the stock market, thus Free Float Market Capitalization method does not consider these shareholdings while computing the market capitalization of the company.

Read Also: How to Calculate PEG Ratio

The main goal in Free Float calculation is to distinguish between strategic shareholders (promoters etc.), whose holdings depend on concerns such as exercising control rather than the economic fortunes of the company, and those holders (public) whose investments depend on the stock’s price and their evaluation of a company’s future prospects. This method is widely used in the computation of stock indices across the world.

What is the Difference Between Market Capitalization and Free Float?

Market cap—or market capitalization—refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.

Why is market capitalization such an important concept? It allows investors to understand the relative size of one company versus another. Market cap measures what a company is worth on the open market, as well as the market’s perception of its future prospects because it reflects what investors are willing to pay for its stock.

• Large-cap companies are typically firms with a market value of $10 billion or more. Large-cap firms often have a reputation for producing quality goods and services, a history of consistent dividend payments, and steady growth. They are often dominant players within established industries, and their brand names may be familiar to a national consumer audience. As a result, investments in large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks, potentially posing less risk in exchange for less aggressive growth potential.
• Mid-cap companies are typically businesses with a market value between $2 billion and $10 billion. Typically, these are established companies in industries experiencing or expected to experience rapid growth. These medium-sized companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid-caps may offer more growth potential than large caps, and possibly less risk than small caps.
• Small-cap companies are typically those with a market value of $300 million to $2 billion. Generally, these are young companies that serve niche markets or emerging industries. Small caps are considered the most aggressive and risky of the 3 categories. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties characteristic of untried, burgeoning markets. On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatile stock price swings in the short term.

Market cap vs. free float market cap

Market cap is based on the total value of all a company’s shares of stock. Float is the number of outstanding shares for trading by the general public. The free-float method of calculating market cap excludes locked-in shares, such as those held by company executives and governments. Free float methodology has been adopted by most of the world’s major indexes, including the Dow Jones Industrial Average and the S&P 500.

What is the Meaning of Free Float Shares?

Free float, also known as public float, refers to the shares of a company that can be publicly traded and are not restricted (i.e., held by insiders). In other words, the term is used to describe the number of shares that is available to the public for trading in the secondary market.

Formula for Free Float

Where:

• Outstanding shares refer to the number of shares held by all of the company’s shareholders
• Restricted shares refer to shares that are not transferable until certain conditions are met. Restricted shares are generally held by corporate management, such as executives and directors.
• Closely-held shares refer to shares that are typically held onto for a very long-term basis. Examples include major long-term shareholders and insiders.

Example of Free Float

Company A is a publicly traded company with 1,000,000 shares authorized. Currently, as indicated on the company’s balance sheet, its total outstanding common shares number 500,000 (50,000 of which are held by the CEO and CFO of the company) while 80,000 shares are held in treasury. Determine the free float of Company A.

The information provided above is illustrated as follows:

• Shares authorized: 1,000,000
• Common shares outstanding: 500,000
• Restricted/Closely-held shares: 50,000
• Treasury shares: 80,000

The free float of Company A is 450,000 shares (500,000 – 50,000).

What is a Good Free Float Percentage?

The short percentage of float is the percentage of a company’s stock that has been shorted by institutional traders, compared to the number of shares of a company’s stock that are available to the public. Short percentage of float is the percentage of shares that short-sellers have borrowed from the float.

What is considered a high short percentage of float is subjective; there is no hard and fast rule. However, a short interest as a percentage of float above 20% is generally considered very high.

Low float stocks are those with a low number of shares. A stock with a float of 10 to 20 million shares or less is considered a low float stock. What is considered a good low float percentage is subjective; traders have different preferences for float percentage. However, most traders look for a percentage between 10% and 25%.

A short float is the number of shares short-sellers have borrowed from the float. Investors will often disagree about how high of a short float should be considered “high.” However, there are some general rules of thumb that most investors abide by: Short interest as a percentage of float above 10% is relatively high, and it could indicate significant pessimistic sentiment; short interest as a percentage of float above 20% is usually considered very high.

How is Free Float Value Calculated?

Let us assume that there is an XYZ company with the following details –

• Oustanding Shares = 20,000 shares
• Promoter Holding = 5,000 shares
• Locked Shares with Shareholders = 2,000 shares
• Strategic holding = 1,000 shares

The current market price is $50 per share. But, first, let us determine the market capitalization and free-float market capitalization.

Market capitalization = total number of shares x current market price = $50 x 20,000 = $1000,000 = $1 million

For calculating the free-float market capitalization, follow these steps: –

• Number of shares unavailable for trading = Promoter Holding + Locked shares with Shareholders + Strategic Holding

= 5,000 + 2,000 + 1,000 = 8,000 shares

• Free Float Market Capitalization = $50 x (20,000 – 8,000)
• Free Float Market Capitalization = $50 x $12,000
• Free Float Market Capitalization = $600,000

What Is a Company’s Float?

The term float refers to the regular shares a company has issued to the public that are available for investors to trade. This figure is derived by taking a company’s outstanding shares and subtracting any restricted stock, which is stock that is under some sort of sales restriction. Restricted stock can include stock held by insiders but cannot be traded because they are in a lock-up period following an initial public offering (IPO).

A company’s float is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. The company is not responsible for how shares within the float are traded by the public; this is a function of the secondary market. Only changes that affect the number of shares available for trade change the float, not secondary market transactions, nor the creation or trading of stock options.

Say the TSJ Sports Conglomerate has 10 million shares in total, but 3 million shares are held by insiders who acquired these shares through some type of share distribution plan. Because the employees of TSJ are not allowed to trade these stocks for a certain period of time, they are considered to be restricted. Therefore, the company’s float would be 7 million (10 million – 3 million = 7 million). In other words, only 7 million shares are available for trade.

It should also be noted that there is an inverse correlation between the size of a company’s float and the volatility of the stock’s price. This makes sense when you think about it, as the greater the number of shares available for trade, the less volatility the stock will experience because the harder it will be for a smaller number of shares to move the price.

By identifying the number of restricted shares versus the number of floating, an investor can better understand the ownership structure. That is, how much control insiders have. For example, Company ABC has 10 million shares authorized and 8 million outstanding. A major company insider owns 500,000 shares. Assuming 8 million of the shares outstanding are also in float, this insider selling their shares would have a key impact on the company’s stock price.

However, that effect would be even greater if there are only 6 million of the 8 million shares in the float. As a real-life example, as of July 13, 2022 Amazon (AMZN) had 10.17 billion shares outstanding. But only 9.16 billion were floating.

What is the Difference Between Free Float and Shares Outstanding?

Shares outstanding and floating stock are different measures of the number of shares of a particular company’s stock. They are two of three share-number metrics that investors often look at to get a comprehensive overview of a company’s stock shares: authorized shares, outstanding shares, and floating shares.

Authorized shares refer to the maximum number of shares that a corporation is legally permitted to issue; it includes already-issued stock, along with shares that have the management’s approval but have not, yet, been released onto the trading market—including stock options. Outstanding shares include those held by shareholders and company insiders. Floating shares indicate the number of shares actually available for trading.

Shares Outstanding

A company’s shares outstanding (or outstanding shares) are the total number of shares issued and actively held by stockholders—both outside investors and corporate insiders. However, they must be actual shares.

A company may provide executives with stock options that can be converted to shares. But such stock benefits, as they’re called, are not included in the tally of shares outstanding until shares have been fully issued. (Stock benefits like stock options do count in the authorized share bucket—that is, the number of authorized shares a company has.)

There can be a couple of ways to identify the shares outstanding. Comprehensively, an investor might look at the “shareholders’ equity” figure on the firm’s balance sheet to identify a company’s shares outstanding. Shareholders’ equity will typically provide the number of total authorized shares and the total outstanding shares.

Additionally, many stock listings and equity data providers daily report a company’s current market capitalization or market cap. This figure can be divided by its share price to identify an outstanding share count.

Floating Stock

Floating stock is the most narrow number of a company’s shares. This measure excludes closely-held shares that are held by company insiders or controlling investors. These stockholders typically include officers, directors, and company-sponsored foundations.

Many indexes use the floating stock of a company as the basis for market cap calculation. These indexes are identified as free float capitalization indexes. The S&P 500 is one example of a free-float index. As such, index providers such as S&P and others are market leaders in setting a precedent for calculating floating stock methodologies.

It can be useful to compare a company’s floating stock (or “float” for short) to its shares outstanding when analyzing it for investment—a figure known as the floating stock percentage.

If a company’s floating stock to outstanding shares percentage is low, it means that the company has a lot of closely-held shares. Large lot trades by those investors could significantly affect the stock’s price and the stock’s volatility. Heavy trading by closely-held shareholders could also affect the stock’s weighting impact in free float capitalization indexes.

Alternatively, if the float is high to the number of outstanding shares, it means a large number of shares are unrestricted and available for trading—the stock is a very liquid one, in other words.

Many investors prize a high float stock: Its share price will be low in volatility, with a low bid-ask spread. If the float suddenly shoots up, though, it could mean that company insiders or institutional investors lack confidence in the stock or are not completely committed to managing its price.

For example, consider shareholders’ equity of XYZ, Corp. The company’s financials report authorized shares, outstanding shares, and floating stock shares:

• 24 billion authorized shares
• 7.50 billion shares outstanding
• 7.00 billion floating shares

The 7.00 billion floating shares are the shares considered for the free float, market capitalization index weightings. In the case of XYZ, it has a relatively small float adjustment. That means it’s a high float stock: The vast majority of its shares are available to the general investing public.

Who Owns Free Float?

Also known as public float, a free float refers to the number of a company’s outstanding shares owned by public investors, excluding locked-in shares held by company managers and officers, controlling-interest investors, governments and other private parties.

Simply put, the term is used to describe the number of shares available to the public for trading in the secondary market. Sometimes, this figure is considered to be a better way of determining market capitalization, as it provides a more accurate representation of the company’s worth according to public investors.

The term is important to potential investors as it gives an insight into the company’s stock volatility. How does it work? It all depends on the size of a free float. Usually, companies with larger free floats are known to be less volatile.

On the other hand, stocks with a smaller free float tend to be more volatile, showing limited liquidity and a wider bid-ask spread, due to the limited number of shares available for trading. Typically, institutional investors choose to invest in stocks with a larger free float, as they can trade a substantial number of shares without making a heavy impact on the company’s share price.

Free floating allows companies to gain access to new capital sources by enabling public investors to put their money into the business. This capital can then be used to expand and develop the business, as well as increase the company’s profits.

Generally, when calculating the size of a free float of a partially privatized company, the large holdings of the company’s managers, founding shareholders and governments are excluded. Therefore, free float is computed by subtracting the locked-in shares from outstanding shares. This is what the free float calculation formula looks like:

Free Float = Outstanding Shares – Locked-in shares

Let’s see how it works in an example. A company has 5 million shares outstanding in total, with 1 million of them in a locked-in position, held by the CTO and CEO of the company. Therefore, according to the formula above, the free float of the company is 4 million shares.

The company’s management can control the number of shares outstanding. For instance, a company can increase its free float by conducting a stock split or selling shares in a secondary offering.

How do you Tell if a Stock is Getting Shorted?

Short selling is a trading strategy commonly used by experienced traders who use speculation to buy and sell shares, hoping the price will drop at a later date. It involves borrowing shares and selling them on the open market. Investors then purchase the same shares later on and pay off the loan for the original purchase, then keep the profits for themselves.

Read Also: What is a Credit Spread?

For general shorting information, such as the short interest ratio (which is the number of a company’s shares that have been sold short divided by the average daily volume) you can usually go to any website that features a stock quotes service. Finance-specific sites are a great option or you can even find related information through specific stock exchange websites.

If you’re not sure where to start or need a refresher on how to locate this information, we’ve highlighted some of the main sites where you can gain the knowledge you need related to short interest data for specific stocks.

If you want more specific information about a particular stock’s shorted shares, such as specific numbers about volume, average daily share volume, or days to cover, you can visit certain websites that provide these details free of charge. Here are some of the most popular sites to visit to get the information to help guide your shorting strategy.

Stock Exchanges

Individual stock exchanges issue general reports at the end of each month, giving investors a short-selling benchmark tool. The free data is generally updated just twice a month. Short interest tables typically show information for the last two reporting dates. Daily short interest data is available but can only be purchased through a subscription.

• New York Stock Exchange (NYSE): According to the NYSE, all of this data is acquired from broker-dealers as part of the exchange’s regulatory requirements. However, the specific site you need to visit depends on the stock exchange in which the stock that you are seeking information for trades. The NYSE calculates its own short interest ratio for the entire exchange, which can be a useful metric for determining overall market sentiment. If the stock that you are interested in is found on the NYSE, you can check out the NYSE Group Short Interest File, a semi-monthly archive of uncovered shorts dating back to 1988. However, you must purchase the report to access the information.
• Nasdaq: Nasdaq publishes short interest reports in the middle and at the end of every month. This means the information traders use is always slightly outdated and the actual short interest may already be significantly different than indicated in the report. If the stock trades on the Nasdaq, you would have to use Nasdaq Trader’s Trading Data, where you can find Nasdaq’s Monthly Short Interest Tool.

Other Sites

There is a variety of financial websites that you can use to get access to free information. You just need to know where to look. Here are some of the most common ones where you can find information on short positions for either specific stocks or on a market-wide basis.

• Yahoo! Finance: You can get a list of the most shorted stocks based on the percentage of shares outstanding from the NYSE and Nasdaq by clicking on the Screeners tab on the homepage and going to the Most Shorted Stocks link.3 You can also find short information for specific stocks. Search for the stock, click on the Statistics tab, and scroll down to Share Statistics, where you’ll find the key information about shorting, including the number of short shares for the company as well as the short ratio.
• The Wall Street Journal: The Wall Street Journal provides short-sale data on any public company that is tracked on the “Market Data” page. Simply search for the ticker symbol of the stock and find the heading “Shares Sold Short” in the right-hand column.
• Other Sites: Many other financial sites track short interest data. You can also use sites like MarketBeat.com, which provides the largest short interest positions, increases, and decreases.