Know The Advantages Of Free-Float Methodology
Free float is a term for trading in stocks. It defines the share ratio of a publicly-traded company traded on the stock market. Keep in mind that at any specified moment, not all free float stocks can actively circulate on the market as many traders buy stocks as a long-term investment.
Put, market-free float relates to readily tradable shares.
So (free float) * (Market Value) = Free Float Market Capitalization.
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How the free float market is calculated:
Total Market Cap =
+ Strategic Investors (Hedge Funds, PE Funds, etc.)
+ Long Term Portfolio Investors (Insurance Companies, Mutual funds, etc.)
+ Short term Portfolio Investors
+ Individual investors
Of all categories Promoter holding is not readily available for trading as is the case with Strategic Investors and Long-Term Investors portfsolio, the balance is a free float. While this is not the precise definition, it differs from one organization to another. Sometimes Free Float includes the Long Term Portfolio Investors.
Free-float methodology’s major advantages
- A free-float index represents market trends more rationally, taking into account only those stocks available for market trading.
- The free-float method makes the index broader by decreasing the concentration of the top few Index companies.
- Free-float index supports both active and passive styles of investment. It helps active managers by allowing them to benchmark their fund yields against an investment index. It provides for an apple-to-apple comparison to facilitate a better assessment of active managers ‘ performance. A Free-float adapted index is the best fit for passive managers as it allows them to monitor the index with the slightest tracking error.
- Free-float methodology enhances index flexibility to include any stock from the listed stock world. It helps improve index coverage on the market and industry.
- Worldwide, the free-float index building methodology is regarded to be industry-standard protocol and has been adopted by all significant index suppliers such as MSCI, FTSE, S&P and STOXX. In 2002, MSCI, a major worldwide index supplier, moved all its indexes to the Free-float Methodology. Also based on the Free-float methodology is the MSCI India Standard Index, followed by Foreign Institutional Investors (FIIs) to monitor Indian equities. NASDAQ-100, the base index for the popular Exchange Traded Fund (ETF) — QQQ is built on the Free-float methodology.
What is the difference between the free-float market capitalization and total market capitalization?
Free float capitalization market– Stocks with low free floats are likely to see higher price volatility because shifting the share price requires fewer trades. On the other side, volatility is smaller in the event of a bigger free float. The number of individuals purchasing and selling the shares in stocks with a big free float is greater, so a low amount of trading does not substantially impact the price.
Total market capitalization – Market capitalization is a significant parameter considered by many investors when placing funds into a company. Some investors are watching free-float market capitalization as it provides greater insight into the holding quality. ET assures you about the meaning and the importance of this.