Investing in public company stocks is one of the most preferred investment options by retail and institutional investors. Even since a company starts its public journey by launching an IPO, investors keep a check on it. After the IPO’s completion, the public company’s shares are available on different stock exchanges.
By holding public company shares, investors stand a chance for capital appreciation. However, investing in a public company is not as simple as it might seem. Investors tend to analyse the profitability and performance of a public company before offering funds.
In addition, they use several metrics to understand the valuation of a publicly traded company. Read on to understand the free float market cap, a crucial metric for valuing publicly traded companies.
Are you familiar with the market cap?
Before we delve deeper, it is essential to understand the concept of market cap/capitalisation. Market cap is a metric used by investors to evaluate the net worth of a publicly traded company. A publicly traded company’s total value is known with the market cap’s help.
In other words, the worth of a publicly traded company within the stock market is determined via its market cap. Therefore, investors tend to analyse the market caps of public companies and make investment decisions accordingly. To calculate the market cap for a public company, you must multiply the number of outstanding shares of the company by the current price of a single share.
Some of you might not be familiar with the concept of outstanding shares. These are the shares issued by a public company and held by investors. Shares that are issued by the company but not held by investors do not fall under the category of outstanding shares. Let us understand the concept of market cap and outstanding shares with an example.
Let us say a company has issued 1,00,000 shares held by institutional, private, and retail investors. These shares are termed outstanding shares for the particular company. The price of a single share is INR 50 in the stock market. In such a case, the market cap for the company will be:
Market Cap = INR (1,00,000) * 50 = INR 50,00,000
Understanding the concept of free float market cap
Free float market cap or capitalisation is also a metric used by investors to determine the worth of a public company in the stock market. However, it is a little different than the regular market cap. Unlike market cap, free float cap does not rely on the total number of outstanding shares held by both private and public investors.
Instead, the free float metric depends on the total number of outstanding shares held by public investors, institutional and retail. You cannot count the outstanding shares held by private investors to calculate the free float metric.
Before moving on to the calculation of the free float metric, it is essential to understand the concept of private investors. Remember that you do not have to count the outstanding shares held by private investors to calculate the free float metric.
Private investors are significant shareholders in a public company with voting, management, and decision-making rights. Some of these private investors might take part in corporate meetings and decide the fate of the company.
Such investors aren’t counted while calculating the free float metric. Institutional and retail investors with no voting rights or lock-up conditions are considered when calculating the free float metric.
Once you identify the free-floating or freely tradable shares of a public company, you can know the free-float market cap. To calculate the free float market cap, you must find the product of the current share price and the number of free-floating shares.
Let us say the current price of a single share of a public company is INR 40. Also, the company has around 50,000 shares held by public investors, retail and institutional. In such a case, the free-float market capitalisation of the company will be:
Free-float Market Cap = INR (50,000 * 40) = INR 20,00,000
You might wonder why investors need to know the market cap and free-float cap. Here’s how investors benefit by knowing the free-float market cap:
- Companies with high free-float market caps are more liquid
- Free-float market cap gives an idea of the number of shares available for trading
- Public companies with a greater number of free-floating shares are likely to be included in popular market indices
- Companies with a high free-float market cap are less vulnerable to price swings in the stock market
- A higher number of free-floating shares indicate that private investors have less control over the company
In a nutshell
Free float market cap can help investors understand how easily the shares of a public company are tradable in the market. Investors can make better decisions when familiar with market cap, free-float market cap, and other financial metrics. Learn more about the free-float market cap now!
