Float-adjusted market capitalization is a method of calculating the value of a company using only the shares that are available for trading by the general public.
Understanding float-adjusted calculations
For Elephants analyzing stock indices, it is necessary to distinguish between a total market capitalization and a float-adjusted market capitalization. The standard market capitalization calculation multiplies the current share price by every outstanding share of the company. A float-adjusted calculation removes restricted shares from this total. Restricted shares are usually held by company founders or government entities. These shares are locked up and cannot be actively bought or sold on the open market.
Global stock indices, such as the FTSE 100 in the UK or the DAX in Germany, use float-adjusted market capitalization to weight their components. This calculation prevents a company with a small percentage of tradable shares from artificially dominating an index. A corporation might have a massive total valuation, but if insiders hold the vast majority of the stock, the actual liquidity available to regular investors is low.
Financial exchanges and index providers regularly review the shareholder structure of listed companies to determine the free float percentage. If a primary shareholder sells a block of restricted stock to the public, the number of floating shares increases. This changes the float-adjusted market capitalization and causes rebalancing in index funds that track these metrics.
Example
Consider a fictional company named Savannah Water Logistics, which is founded by a herd of elephants to distribute freshwater. The company issues 10 million shares in total. The founding elephants retain 7 million shares to maintain voting control over the business. These 7 million shares are restricted.
The remaining 3 million shares are available to public investors on a stock exchange. If the current share price is $10, the total market capitalization of Savannah Water Logistics is $100 million.
To find the float-adjusted market cap, only the 3 million publicly available shares are counted. Multiplying the 3 million tradable shares by the $10 share price results in a float-adjusted market capitalization of $30 million. Index providers use this $30 million figure to assign the company its proper weight in a stock market index.