Free-Float Methodology

What it is

The free-float methodology (also called float-adjusted capitalization) calculates a company’s market capitalization using only shares available for public trading. It excludes restricted or locked-in shares held by insiders, governments, or other large, non-tradable holders. Many major indexes (for example, the S&P 500, FTSE, and MSCI indexes) use free-float weighting to better reflect the shares that actually trade in the market.

Key takeaways

• Free-float market capitalization reflects only tradable shares, excluding insider- or government-held shares.
• It typically produces a smaller market-cap figure than full-market capitalization.
• Free-float weighting reduces concentration among the largest issuers and often lowers index volatility.
• Stocks with larger free floats tend to be less volatile and are preferred by institutional investors.

How it works

Free-float methodology adjusts each company’s weight in an index according to the proportion of shares available to public investors. By focusing on tradable supply, the method aims to measure the portion of a company’s equity that can realistically affect market prices. A higher free-float percentage generally corresponds with greater liquidity and lower price sensitivity to individual trades; a lower free-float percentage can lead to higher volatility because fewer shares are available to absorb buying or selling pressure.

Calculation

Free float (shares) = Outstanding shares − Restricted (locked-in) shares
Free-float market capitalization = Share price × Free-float shares

You can also express free float as a percentage of outstanding shares to show how much of a company is tradable.

Example

If a company has 125,000 shares outstanding, 25,000 of which are locked in, and a share price of $100:
* Free-float shares = 125,000 − 25,000 = 100,000
* Free-float market cap = 100,000 × $100 = $10,000,000

Price-weighted vs. market-cap-weighted indexes

• Price-weighted indexes assign weight based on share price; higher-priced stocks have more influence regardless of company size. The Dow Jones Industrial Average is a prominent example.
• Market-cap-weighted indexes assign weight based on (adjusted) market capitalization. Most modern indexes use market-cap weighting, and many apply free-float adjustments so weights reflect tradable equity rather than total outstanding shares.

FAQs

Q: How do you calculate free float?
A: Subtract restricted shares from outstanding shares. Multiply the result by the share price to get free-float market capitalization.

Q: Is the S&P 500 free-float adjusted?
A: Yes. The S&P 500 uses free-float-adjusted market capitalization for constituent weighting.

Q: What is market capitalization?
A: Market capitalization equals outstanding shares multiplied by the current share price (unadjusted market cap). When adjusted by free float, it reflects only tradable shares.

Bottom line

Free-float methodology provides a clearer view of market dynamics by weighting companies according to the shares actually available to trade. That makes index performance and individual stock behavior more representative of liquidity and investor access, reducing distortions that can arise from large blocks of non-tradable shares.