Free float is the portion of a listed company's shares that is available for the public to buy and sell on the stock exchange. It leaves out shares held by promoters, insiders, the government and other holders whose shares are locked in. The number is therefore smaller than the total shares issued.
For individuals asking what is free float, the basic idea is that the market counts only these tradable shares when it measures a company for index purposes. The shares held by promoters and the government are kept aside in that measurement. A company may have a very large number of shares issued, but the number counted by the market will be lower.
How free float is counted
The value of the tradable shares is found by multiplying the number of free-float shares by the current share price. The same result can be reached by multiplying the total market capitalisation by its free-float factor. The factor is the part of the total shares that is open to public trading.
For a company with a total market capitalisation of Rs 2,000 crore and a free-float factor of 0.55, the free-float market capitalisation will be Rs 1,100 crore.
The A regulated electronic marketplace in Mumbai where buyers and sellers trade shares and other securities at publicly visible prices. Read the full meaning of NSE (National Stock Exchange) uses Investible Weight Factors to capture the free float, so that large promoter holdings have limited influence on the index. The BSE Ltd, formerly the Bombay Stock Exchange, is a Mumbai based electronic exchange where shares and other securities are traded under SEBI oversight. Read the full meaning of BSE (Bombay Stock Exchange) applies a free-float factor to the total market capitalisation.
Why it sets index weight, and a common mix-up
The Nifty 50 is a free-float market-cap-weighted index and the Sensex weights are also based on free-float market capitalisation. A company with a very large total market capitalisation but a small free float gets a lower weight than a smaller company with a high free float. Global index providers such as MSCI, FTSE and STOXX also use the free-float method as their standard.
A common confusion is between total market capitalisation and free-float market capitalisation. Total market capitalisation counts every share issued by company, while free-float market capitalisation counts only the shares that are available for trading. The two figures for one company can therefore differ widely.