How to Calculate Free Float Shares

It's the hidden numbers that tell the real story. When you look at a company’s stock price, you're not just seeing a simple valuation. You're witnessing a deeper calculation, one that’s often overlooked—free float shares. These are the shares available for public trading, excluding those held by insiders, executives, and other institutional shareholders. The higher the free float, the more liquid the stock, which generally means less volatility and a more accurate representation of a company’s market value. But calculating free float shares isn’t as simple as pulling up a stock price chart. There are nuances and hidden layers that can shape the way you, as an investor, view a company.

Understanding the Free Float Concept
Before you dive into the calculation, it's crucial to understand what free float actually represents. Free float is essentially the portion of a company’s outstanding shares that are available to be traded by the public. This excludes shares that are restricted, such as those owned by insiders, the government, or entities with long-term interests in the company. So, why does this matter? Because free float determines how easily a stock can be traded on the open market, and low float stocks tend to be more volatile, while high float stocks are generally more stable.

Why Investors Care About Free Float
In the fast-paced world of stock trading, liquidity is king. The more shares available to trade, the easier it is for buyers and sellers to transact without drastically affecting the stock’s price. If a company has a high percentage of its shares locked away by insiders or institutions, the remaining shares available for public trading—the free float—becomes a vital figure. Why? Because fewer shares in circulation mean every transaction can lead to price swings, making it harder to predict or stabilize the stock’s value.

How to Calculate Free Float Shares
Free float shares can be calculated with a straightforward formula:

Free Float = Total Outstanding Shares - Restricted Shares

Let’s break that down:

1. Total Outstanding Shares: This is the total number of shares a company has issued, including shares held by insiders, institutions, and the general public.
2. Restricted Shares: These are shares that cannot be traded freely on the open market. Often, restricted shares are held by insiders, like executives or early investors, and are subject to various lock-up periods or contractual obligations.

For example, if a company has issued 10 million shares in total, but 3 million of those are held by insiders and are restricted, the free float would be 7 million shares. This is the number of shares available for everyday investors to buy or sell on the market.

Different Types of Investors and Their Impact on Free Float
Understanding who holds the restricted shares is just as important as knowing the free float number itself. Institutional investors, such as mutual funds and pension funds, may hold significant chunks of restricted shares, but these are usually long-term holders. That means their holdings don’t regularly impact the day-to-day trading of a stock. On the other hand, insider holdings (such as executives or board members) can have a more profound effect. When these shares become unlocked or insiders decide to sell, the market can see a sudden increase in available shares, affecting the price.

What About Share Buybacks and New Issuances?
Companies frequently engage in share buybacks, where they purchase their own stock from the market. This can drastically reduce the free float, as fewer shares remain available for public trading. Conversely, new issuances, such as when a company raises capital through an additional public offering, can increase the free float, making more shares available for the general public.

The Effect of Free Float on Stock Volatility
One of the most significant implications of free float is its effect on stock volatility. A low float stock (a stock with a small number of shares available for public trading) tends to experience larger price swings. This is because, with fewer shares available, even small buying or selling actions can significantly impact the stock’s price. For example, if a high-net-worth individual decides to purchase a large portion of shares in a company with a low float, they can cause the stock price to skyrocket due to the limited number of shares available.

On the other hand, stocks with a large free float generally exhibit more stability. These stocks can absorb more substantial trading volumes without seeing major price changes. For institutional investors or traders looking to execute large trades, these stocks are more attractive because they provide liquidity and minimize market impact.

Free Float’s Role in Indexing and ETFs
Another reason why free float is so critical is its role in stock market indexing. Many major indices, such as the S&P 500, use a free float market capitalization methodology to determine the weightings of individual stocks within the index. This means a company’s weight in the index is determined not by its total market cap, but by its free float market cap—the market cap derived from just the shares available for public trading.

For Exchange-Traded Funds (ETFs), this is also significant. ETFs aim to replicate the performance of a particular index, so they base their share holdings on the free float of the companies within that index. This allows for a more accurate reflection of market sentiment and stock performance.

Examples and Case Studies
Let’s look at some real-world examples to better understand the free float calculation.

• Example 1: Tech Startups
  In tech startups, especially after an Initial Public Offering (IPO), the free float tends to be small because a large portion of shares are held by founders and early investors. Over time, as lock-up periods expire, more shares become available to the public, increasing the free float and potentially stabilizing the stock price.

• Example 2: Blue Chip Companies
  In contrast, blue-chip companies like Apple or Microsoft usually have a massive free float. These companies are well-established, and a significant portion of their shares are available for public trading. As a result, these stocks tend to be less volatile and provide more liquidity to investors.

How Traders and Investors Use Free Float
Free float is not just a passive number—it's a key factor for traders and investors to consider when making investment decisions. Day traders often prefer low float stocks because the volatility allows for larger potential gains (albeit with higher risks). On the other hand, long-term investors might focus on high float stocks because they provide liquidity and stability, making it easier to enter or exit large positions without causing massive price fluctuations.

Conclusion: Understanding Free Float is Key to Smarter Investing
In a world where stock prices seem to rise and fall based on speculation and sentiment, knowing how to calculate free float shares can give you an edge. It’s not just about how many shares a company has—it's about how many are actually available for you to trade. Whether you’re a trader looking for volatile stocks with potential for quick gains, or a long-term investor seeking stability, free float is a crucial metric that should not be ignored.