View source for Free float

'''[[Free float]]''' refers to the proportion of a company's outstanding shares that is considered available for trading by investors in the public market. It excludes shares that are restricted from public trading or held in strategic positions, subject to the rules and methodology used to determine investability.

Free float is an important concept in [[Stock market index|stock market indices]] because index providers may use free-float-adjusted market capitalization rather than a company's total market capitalization when determining its index weight.

== Calculation ==
A simplified free-float-adjusted market capitalization can be expressed as:

<math>
\text{Free-Float-Adjusted Market Capitalization}
=
\text{Market Capitalization}
\times
\text{Free Float Factor}
</math>

where the free float factor represents the proportion of shares considered available to public investors.

A simplified free-float percentage is:

<math>
\text{Free Float Percentage}
=
\frac{\text{Shares Available to Public Investors}}
{\text{Total Shares Outstanding}}
\times 100\%
</math>

The actual calculation can be more complex because different index providers apply specific rules for determining which shareholdings are freely available for investment.

== Restricted and strategic holdings ==
Shares may be excluded from free float when they are considered unavailable for ordinary public investment.

Examples can include holdings that are:

* controlled by founders or controlling shareholders;
* held by governments;
* held by corporate groups for strategic purposes;
* subject to contractual restrictions;
* subject to other restrictions specified by an index methodology.

The treatment of particular holdings depends on the applicable rules.

== Free float and market capitalization ==
[[Market capitalization]] is generally calculated as:

<math>
\text{Market Capitalization}
=
\text{Share Price}
\times
\text{Shares Outstanding}
</math>

Free-float-adjusted market capitalization modifies this value to reflect the shares considered available to investors.

For example, if a company has a market capitalization of $10 billion and 70% of its shares are considered free float:

<math>
\text{Free-Float-Adjusted Market Capitalization}
=
\$10\text{ billion}
\times 70\%
=
\$7\text{ billion}
</math>

== Free-float weighting ==
Many [[Stock market index|stock market indices]] use free-float-adjusted market capitalization when determining constituent weights.

A simplified index-weight calculation is:

<math>
\text{Index Weight}
=
\frac{\text{Free-Float-Adjusted Market Capitalization of Constituent}}
{\text{Total Free-Float-Adjusted Market Capitalization of Index}}
\times 100\%
</math>

This means that a company with a large total market capitalization may have a relatively smaller index weight if a substantial proportion of its shares are not considered freely available to public investors.

== Example ==
Suppose two companies have the following characteristics:
{| class="wikitable"
!Company
!Market Capitalization
!Free Float
!Free-Float-Adjusted Market Capitalization
|-
|Company A
|$10 billion
|80%
|$8 billion
|-
|Company B
|$8 billion
|50%
|$4 billion
|}
Although Company A has a higher total market capitalization, the difference becomes larger when free float is taken into account.

The combined free-float-adjusted market capitalization is:

<math>
\$8\text{ billion}+\$4\text{ billion}
=
\$12\text{ billion}
</math>

Therefore, the simplified index weights would be:

<math>
\text{Company A Weight}
=
\frac{8}{12}
\times100\%
=
66.67\%
</math>

and:

<math>
\text{Company B Weight}
=
\frac{4}{12}
\times100\%
=
33.33\%
</math>

== Free float and stock market indices ==
Free float is particularly important for indices that seek to represent the portion of the equity market that is accessible to investors.

Index providers may apply free-float adjustments to:

* determine constituent eligibility;
* calculate constituent weights;
* maintain investability;
* account for changes in share ownership.

Examples of major index families that use free-float concepts include the [[FTSE UK Index Series]], [[S&P 500]], and [[MSCI]] equity indices.

== FTSE Russell ==
[[FTSE Russell]] uses free-float and investability factors in the construction of its equity indices.

For indices such as the [[FTSE 100]], [[FTSE 250]], [[FTSE 350]], and [[FTSE All-Share Index]], constituent representation is affected by the proportion of shares considered available to investors under the applicable FTSE Russell methodology.

Changes in free float can therefore result in changes to a company's index weight even when its share price and total number of shares outstanding remain unchanged.

== Changes in free float ==
A company's free float can change because of events such as:

* sale of shares by a controlling shareholder;
* acquisition of shares by a strategic investor;
* government privatization;
* issuance of new shares;
* share buybacks;
* changes in ownership restrictions;
* changes in shareholder status.

Index providers may adjust the free-float factor when qualifying changes occur.

== Importance ==
Free float helps distinguish a company's total equity value from the portion of its shares that is considered available to public investors. It is therefore an important concept in [[portfolio management]], [[Stock market index|index construction]], [[Passive management|passive investment]], and the measurement of investable market capitalization.

== See also ==

* [[Market capitalization]]
* [[Stock market index]]
* [[FTSE Russell]]
* [[FTSE UK Index Series]]
* [[FTSE 100]]
* [[FTSE 250]]
* [[FTSE 350]]
* [[FTSE All-Share Index]]
* [[FTSE SmallCap]]
* [[Index fund]]
* [[Exchange-traded fund]]
* [[Benchmark (finance)]]
* [[Portfolio management]]
* [[Passive management]]