What is free float or public float and how to calculate it?

When analysing a company for investment purposes, one of the key aspects to consider is its shares – such as number, price, and other metrics.

In this context, free float and public float are two key concepts. Read on to find out what they are and how they are calculated.

Public float UK

Understanding free float

Public float, or simply just float, represents the percentage of a company's outstanding shares that are in the hands of public investors. Free float typically excludes shares held by insiders and major shareholders, focusing on those readily available for trade, whereas public float can be more broadly inclusive of all shares available to the public, even if some large holders are part of that public.

However, in some contexts, public float and free float are used synonymously.

Why is public float important for the company?

In the process of selecting stocks, investors should engage in fundamental analysis, which involves evaluating a company's financial statements, understanding its market position, and analysing key financial ratios. Like the free float or public float.

A larger public float typically means more shares are available for trading, which can lead to better liquidity. This means that it's easier for investors to buy and sell shares without affecting the stock price too much.

With more shares available for trading, the impact of large trades on the stock's price is usually reduced, leading to less volatility. This can make the stock more attractive to investors who prefer stability.

Many stock indices require a certain minimum public float for a company to be included. For example, indices like the S&P 500 or FTSE 100 use public float to determine a company's weight in the index. Being part of these indices can increase a stock's visibility and attractiveness to investors.

A higher public float can be a sign of a company's maturity and stability. It shows that the company isn't tightly controlled by a few individuals or entities, which can increase investor confidence and potentially lead to a higher stock valuation.

Furthermore, choosing the best broker for your needs is an essential step in the investment process. A suitable broker not only facilitates the execution of trades but also provides access to essential tools for fundamental analysis, including detailed financial reports, analyst ratings, and market research. This support is invaluable for investors in making informed decisions and identifying the most attractive investment opportunities based on comprehensive analysis.

Free float calculation

  1. Find the total number of shares: First, you need to know the total number of shares the company has issued. This is like counting all the slices of a pie.
  2. Identify the shares not available for public trading: Next, figure out how many shares are not available for the public to buy and sell. These could be shares held by the company’s founders, top executives, or big investors who have restrictions on selling their shares. It’s like setting aside some slices of the pie for specific people who won’t share them right now.
  3. Subtract to get the float: Finally, subtract the number of shares not available for public trading from the total number of shares. This gives you the public float. It’s like taking the whole pie and removing the slices set aside to see what’s left for everyone else.

Public float formula

So, in a formula, it looks like this:

Public Float = Total Number of Shares – Shares Not Available for Public Trading


Example:

Total shares: 350,000 shares

Shares not available for public trading: 50,000 shares

Public float= 350,000 – 50,000 = 300,000 shares.

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Summary

In conclusion, the public float is a term that defines all the shares of a company available to the public. It is calculated by subtracting the number of shares not available for public trading from the total number of shares.

FAQs

Does public float affect a company's stock price?

Yes, public float can affect a stock's price. A smaller float can lead to higher volatility in the stock price, while a larger float tends to stabilise price movements.

Can public float change over time?

Yes, public float can change over time due to various factors, such as the company issuing more shares, buybacks, or insiders selling or buying shares.

Does a higher public float mean better investment potential?

Not necessarily. While a higher public float can mean more liquidity and less volatility, it doesn't directly correlate with a company's fundamentals or investment potential.

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