Free-Float Methodology
Categories: Accounting, Company Valuation
The official name for the way we at Shmoop treat a vacation at the beach. Swimming is for suckers.
Also, it relates to methods of valuing a public company's worth.
A firm's market capitalization represents a common way of measuring its worth. Typically, you would calculate the figure by multiplying the firm’s current share price by the amount of shares it has outstanding.
The number you get represents the amount you’d need in order buy all the equity a company has (sometimes more than trillion dollars for the biggest companies, like Apple or Amazon...depending, of course, on its current share price).
Free-float methodology represents an alternative way to calculate the figure. Instead of using all the outstanding shares, the free-float method only counts shares currently available on the public market.
So instead of measuring the amount of cash needed to buy all the shares, it represents the total you’d need to buy all the shares you can easily get your hands on. Other shares (those held by family trusts, for instance, or company executives), are left out of the calculation.
Related or Semi-related Video
Finance: What is Float?13 Views
Finance a la shmoop what is float? well this floats and this sinks to the bottom [Shark eats another fish]
and well just doesn't move well float in a financial sense is kind of the same
thing sorta..... whatever dot-com goes public and sells 30% of itself to the public it
had 50 million shares before the IPO and then it sold 15 million shares so that
now there are 65 million outstanding right it just ran the Xerox machine [Shares printing from xerox machine]
printed 15 million shares and sold them well at this moment the shares trading
or the float are just 15 million that's the float that 15 million numbers the
shares trading well then gradually after six months or so insiders begin selling
their shares so that you know they can buy Porsches and diamond-studded tennis [Diamond studded tennis racket appears]
rackets and pay divorce settlements and all that stuff so twelve million from
that 50 million pool now go from being sunk or not moving at all to floating or
being in the normal trading pool which will have grown from yes 15 million to
now 27 million that 27 million shares is the float so why does float matter well
it's a direct reflection of the liquidity of the company well let's say
that on average a given company trades two percent of its shares you know the
ones that are floating so here two percent of 27 million is just a little
over half a million shares a day or 540 thousand shares a day that's actually a
really small amount let's say the stock was trading for 20 bucks it's only 10 [Magnifying glass inspects cash]
million dollars a day in total trade volume for a company that has a much
larger market cap that's tiny teeny teeny tiny so for larger mutual funds
which are tens of billions of dollars in size a tiny float makes it really hard
for them to get into the stock and more importantly get out of the stock when [People frantically moving in a stock market house]
they want to so those big funds generally just avoid stocks with tiny
floats and the cost to the company is that well there's less demanders or
buyers for it so its stock tends to trade at lower multiples and it's also a
problem in that the shareholders of the very large mutual funds have the [Businessmen shaking hands]
ear of very large companies who often are you know acquisitive so that the
tiny companies with small floats aren't whispered about by the fund managers to
the companies who might be thinking about buying whatever.com or you know
whatever so yeah that's the float and if you're a big pond you, you know want to
avoid the small fish [Small fish float to the top of a pond]