Free-Float Methodology

AAA

DEFINITION of 'Free-Float Methodology'

A method by which the market capitalization of an index's underlying companies is calculated. Free-float methodology market capitalization is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market. Instead of using all of the shares outstanding like the full-market capitalization method, the free-float method excludes locked-in shares such as those held by promoters and governments.

Calculated as:

Free-Float Methodology


INVESTOPEDIA EXPLAINS 'Free-Float Methodology'

The free-float method is seen as a better way of calculating market capitalization because it provides a more accurate reflection of market movements. When using a free-float methodology, the resulting market capitalization is smaller than what would result from a full-market capitalization method.

Free-float methodology has been adopted by most of the world's major indexes, including the Dow Jones Industrial Average and the S&P 500.

.

RELATED TERMS
  1. Nasdaq

    A global electronic marketplace for buying and selling securities, ...
  2. Dow Jones Industrial Average - ...

    The Dow Jones Industrial Average is a price-weighted average ...
  3. Price-Weighted Index

    A stock index in which each stock influences the index in proportion ...
  4. Weighted Average Market Capitalization

    A stock market index weighted by the market capitalization of ...
  5. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  6. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
RELATED FAQS
  1. How are S&P 500 index components weighted?

    S&P 500 components are weighted by free float market capitalization. Larger companies affect the value of the index to ... Read Full Answer >>
  2. How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S.market index that gives investors an idea of the overall movement in the U.S.equity market. The ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What is the difference between shares outstanding and floating stock?

    Shares outstanding and floating stock are different measures of the shares of a particular stock. Shares outstanding is the ... Read Full Answer >>
  5. What is the difference between market risk premium and equity risk premium?

    The only meaningful difference between market-risk premium and equity-risk premium is scope. Both terms refer to the same ... Read Full Answer >>
  6. What is the difference between the QQQ ETF and other indexes?

    QQQ, previously QQQQ, is unlike indexes because it is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. The ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Which Mutual Fund Market Cap Suits You?

    Different funds invest in companies with different market caps. Find out which is right for you.
  2. Insurance

    Market Capitalization Defined

    Find out the differences between mega-, large-, mid- and small-cap stocks and how each suits different investing styles.
  3. Forex Education

    The New World Of Emerging Market Currencies

    Take advantage of foreign currency markets without stepping out of your house.
  4. Economics

    The ABCs Of Stock Indexes

    Indexes can track market trends, but they're not always reliable. Can you trust them?
  5. Term

    How Equity Capital Markets Work

    An equity capital market is a market existing between companies and financial institutions that raises money for the companies.
  6. Trading Strategies

    Microsoft's Game of Catch-Up With The Dow

    Microsoft (MSFT) underperformed the Dow Jones Industrial Average during the 2002 to 2007 bull market, but it has played catch-up in recent years.
  7. Economics

    Do Transport Stocks Signal a U.S. Selloff?

    The Dow Jones Transportation Average index has underperformed the broader DJ Industrials Average, leading some market watchers to speculate a selloff.
  8. Stock Analysis

    IBM Vs. The Dow Jones Industrial Average

    IBM has lagged the Dow since 2013 and could fall further before finding enthusiastic buyers.
  9. Investing Basics

    List of the Major Stock Exchanges in the Caribbean

    Though the Caribbean is well-known for its beautiful beaches and vibrant music, it has an emerging capital market that should not be ignored.
  10. Stock Analysis

    Why Hasn't McDonald's Beaten The Dow Recently?

    McDonald's has underperformed the Dow Industrials since 2009, but a reorganization and buyback could turn things around.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!