There are many ways to determine the company's size. There are two ways to measure the size of a company. One is free-float market capitalization and the other is total market capitalisation. Indian bourses employ the free-float capitalisation method to calculate the index's value. How much does this make a difference in the valuation of a company's size? Let's find out.
Market capitalization or market cap is the company's outstanding number of shares divided by the stock price. If company A has 50,000 shares outstanding and each share is priced at Rs. If company A has 50,000 shares outstanding and each share is priced at Rs. 25 lakh. Companies are classified based on their market capital.
To calculate the total market capitalization of a company, all shares are taken into account, both those publicly traded and those held by government, promoters or other private parties. We exclude shares held privately by trusts or promoters in order to calculate the free-float capitalisation. To calculate a free-float market capitalization of a company, we only consider shares that are held and traded by the general public. We multiply these with the share price.
Let's look at an example to understand the concept.
Let's say company B has 60,000 shares that are publicly traded and 40,000 that are owned by family members and the promoters. Each stock has a face value of Rs. 50. The total market cap of the company would now be Rs.50 million. The company's free-float market capital is Rs.30 million. Companies with large government holdings would have a greater difference in their total market cap than their free-float market caps.
Coal India, for example, has a market cap of Rs. 31,168 crore is much less than its total market capital of Rs. Due to a large government holding, 91 608.96 crore. Another real-life example is the Rs. 1.33 lakh crore, and the free-float market capital is Rs. 1.08 lakh crore as of April 17, 2020
The volatility of a company with a smaller free-float will be higher than one with a larger. This is because it takes less traders to cause price changes when the free floating size is small. However, companies with larger free-float sizes have more traders, so prices can change more quickly. Volatility is lower in these companies.
Indian stock exchanges Bombay Stock Exchange and National Stock Exchange use free-float market capitalisation as an index value calculation tool. This is one of the most important applications. This is the sum total of all the free-float market caps of its listed entities. This means that a company with a higher free-float component will have a greater market weight in the index.
Stock exchanges around the world use the free-float marketplace cap method to value indices. This eliminates the effect of shares held in government hands or promoted shares that are not being used to reflect market trends in terms pricing and weightage.