Free float

Free float

What is free float market capitalization?

Free float is a term in stocks trading. It describes the proportion of shares of a publicly traded company that is traded in the stock market.

Note that not all free float shares may be actively circulating on the market at any given time as many traders purchase shares as a long-term investment.

For example, a company that has issued 1 million shares, but has withheld 40,000 shares that are privately owned by, say, family board members would have a free float market capitalisation of 96% and the actual number of free float shares would be 960,000.

If the term "float" is used alone, it can mean the entire market capitalisation of the company.

How free float market cap affects trading

Usually, a larger free float means that the volatility of a stock is lower. This is because with a larger free float, there will be a larger number of traders buying and selling the shares. Thus, a small amount of trading will probably not affect the price much.

Companies with a smaller free float are likely to see more share price volatility, as it takes fewer trades to move the price significantly.

An extreme example for this happens when the free float is smaller than the number of options in the hands of a single potential buyer. If the holder of the options calls them, the issuer of the options would be in a scenario where they must buy the shares from the very small free float.

This is what happened in October 2008 when Porsche tried to take over Volkswagen. The free float of the Volkswagen shares was below 5%, and Porsche called many of its options. The subsequent temporary spike in the price of the Volkswagen shares caused the German car maker to be world's most valuable company by market capitalisation for a short period of time.

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