# Understanding Free-Float Methodology: Calculate Market Capitalization

## What Is Free-Float Methodology?

The free-float methodology is a widely accepted system for calculating the market capitalization of companies listed in stock indexes. By focusing only on shares available for public trading, excluding those held by insiders or restricted from the market, this method offers a more accurate reflection of market dynamics than the full-market capitalization method. Major indices like the S&P 500 utilize this approach, highlighting its importance in financial markets.

### Key Takeaways

*   The free-float methodology calculates market capitalization by considering only shares available for public trading, excluding insider and restricted shares.  
    
*   This approach is considered more reflective of market movements due to its focus on actively traded shares, leading to potentially lower volatility.  
    
*   Major global indexes like the S&P 500 and FTSE 100 use the free-float methodology to provide a more accurate picture of market dynamics.  
    
*   Companies with a larger free float often exhibit lower stock volatility, making them more appealing to institutional investors.

## Insights into the Free-Float Methodology

The free-float methodology is sometimes referred to as float-adjusted capitalization. According to some experts, the free-float method is considered to be a better way of calculating market capitalization (as opposed to the full-market capitalization method, for example).

Full-market capitalization includes all of the shares provided by a company through its stock issuance plan. Companies often issue unexercised stock to insiders through [stock option](https://www.investopedia.com/terms/s/stockoption.asp) compensation plans.

Other holders of unexercised stock can include promoters and governments. Full-market capitalization weighting is rare because it can significantly alter index returns due to varied company stock issuance strategies.

The free-float method often better reflects market movements and the stocks available for trading. When using a free-float methodology, the resulting market capitalization is smaller than what would result from a full market capitalization method.

Indexes using free-float methodology reflect market trends by considering only tradable shares. It broadens the index by reducing the concentration of top companies.

## Calculating Market Capitalization With the Free-Float Method

Free-float methodology is calculated as follows:

**FFM = Share Price x (Number of Shares Issued – Locked-In Shares)**

The free-float methodology has been adopted by many of the world's major indexes. It is used by the S&P 500 Index, by Morgan Stanley Capital International (MSCI) World Index, and by the Financial Times Stock Exchange Group (FTSE) 100 Index.

There is also a relationship between free-float methodology and [volatility](https://www.investopedia.com/terms/v/volatility.asp). The number of free-floating shares of a company is inversely correlated to volatility. Typically, a larger free-float means that the stock’s volatility is lower because there are more traders buying and selling the shares.

That means that a smaller free float equates to higher volatility (since fewer trades move the price significantly and there are a limited amount of shares available to be bought and/or sold). Most [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) prefer trading companies with a larger free float because they can buy or sell a large number of shares without having a big impact on the price.

## Comparing Price-Weighted and Market-Capitalization-Weighted Indexes

[Indexes](https://www.investopedia.com/terms/i/index.asp) in the market are usually weighted by either price or market capitalization. Both methodologies weigh the returns of the indexes’ individual stocks by their respective weighting types. Market capitalization weighting is the most common index-weighting methodology. The leading capitalization-weighted index in the United States is the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) Index.

The type of weighting methodology used by an index significantly affects the index’s overall returns. Price-weighted indexes base returns on the stock prices, giving more weight to costlier stocks.

In a price-weighted index, stocks with a higher price receive a higher weighting and, thus, have more influence on the returns of the index (regardless of their market capitalizations). Price-weighted indexes versus capitalization-weighted indexes vary considerably due to their index methodology.

In the trading market, very few indexes are price-weighted. The [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) is an example of one of the few price-weighted indexes in the market.

## Practical Example of Free-Float Methodology in Action

Suppose that stock ABC is trading at $100 and has 125,000 shares in total. Out of this amount, 25,000 shares are locked in (meaning that they are held by large institutional investors and company management and are not available for trading). Using the free-float methodology, ABC's market capitalization is 100 x 100,000 (total number of shares available for trading) = $10 million.

## How Do You Calculate Free Float?

To calculate free float, you take a company's outstanding shares and subtract its restricted shares. To get the company's free-float market capitalization, take the free-float number and multiply it by a company's share price.

## Is the S&P 500 Index Free Float?

Yes, the S&P 500 Index utilizes a free-float methodology. This means that for all of the companies in the S&P 500, their market cap is free floating—only the available shares for public trading are taken into consideration for the calculation; no restricted shares.

## How Do You Calculate Market Cap?

Market cap, or market capitalization, is calculated by taking a company's outstanding shares and multiplying them by the company's share price. For example, if a company had 50,000 shares outstanding and a share price of $10, its market cap would be $500,000.

## The Bottom Line

Free-float methodology, by excluding locked-in shares like those held by insiders and governments, offers a clearer reflection of a company’s market value through its available shares for trading. This approach, used in major indexes like the S&P 500, ensures a more accurate portrayal of market movements and stock volatility, empowering investors with actionable insights into trading dynamics.

> **Article Sources**
>
> 1.  S&P Dow Jones Indices. "[S&P Float Adjustment Methodology](https://www.spglobal.com/spdji/en/documents/index-policies/methodology-sp-float-adjustment.pdf)," Page 2.