Free Float

Key Highlights

• Free Float refers to the portion of a company’s outstanding shares that is available for trading in the open market.

• Implications of free float includes better trading efficiency, more reliable price signals and index exposure.

What is Free Float?

Free Float refers to the portion of a company’s outstanding shares that is available for trading in the open market. These shares are not held by promoters, strategic investors, or other long-term locked-in shareholders.

Why Free Float Matters?

• Market Liquidity: Higher free float generally improves trading activity, narrow spreads, and efficient price discovery.

• Volatility Impact: Stocks with low free float tend to display sharper price movements because small trades can influence prices significantly.

• Index Eligibility: Many equity indices, including major Indian benchmarks, use free-float market capitalization for index weight calculations.

How Free Float Is Determined?

Free float is calculated by excluding shareholdings that are not typically traded, such as:

• Promoter and promoter-group holdings

• Government stakes (in some cases)

• Employee stock held under lock-in

• Strategic or cross-holding investments

• Shares under long-term agreements or restrictions

• The remaining shares constitute free-floating shares.

Implications of Free Float

• Better Trading Efficiency: Higher free float allows easier entry and exit for institutional and retail investors.

• More Reliable Price Signals: Prices reflect broader market participation rather than concentrated ownership.

• Index Exposure: Companies with higher free float often have larger index weights, affecting fund flows from passive and institutional investors.