Floating capital (free float)

Floating capital is the percentage of a company’s outstanding shareholders that can be acquired by retail investors. It is also known by its English name, free float.

Floating capital (free float)

These shares are not controlled by the dominant group and / or the strategic investors of the company. Therefore, they can be freely acquired in secondary markets.

For a company it is important to have a notable percentage of shares as free float as this provides investors with greater security. This is so because the greater the free float, the greater the facilities for an investor to find a counterpart in the market. In other words, the higher the free float, the greater the chances for an investor to find a seller, if he wants to buy shares, or to find a buyer, if he wants to sell shares that he already owned.

In this way, stocks intended to be free float provide liquidity to secondary markets in addition to giving them greater depth.

On the other hand, the fact that companies have a high floating capital favors the correct process of price formation and reduces their volatility. This has been the subject of debate and opens the door (in some stock markets) to a possible regulation or a regulation that lays the foundations for an adequate percentage of free float for companies.

Floating capital calculation

The formula for calculating floating capital is as follows:

Free float = Shares outstanding – Restricted Shares

  • Shares in circulation: Total number of shares in which the capital of the company is divided.
  • Restricted shares: Shares owned by shareholders belonging to the dominant group (also known as controlling shareholders). These shares are not considered available for sale.

Example to calculate free float

Suppose a listed company has a capital of € 1,000,000 divided into 100,000 shares (100,000 shares with a par value of € 10 each). The capital is controlled by 2 groups of majority or controlling shareholders.

  • Group A owns 10% of the total capital (therefore this group owns 10,000 shares with a nominal value of € 10).
  • Group B owns 20% of the total capital (therefore this other group has in its possession 20,000 shares with a nominal value of € 10).

Therefore, taking into account the data and applying the formula:

Shares Outstanding: 100,000

Restricted shares: 30,000 (10,000 from group A + 20,000 from group B).

Floating capital = 100,000- (10,000 + 20,000) = 70,000 shares. Therefore, this company dedicates 70% of its capital to floating capital.

Floating capital is also used to build weighted capitalization ratios. Depending on the free float tranche, the company will have a higher or lower weight in the index. In addition to the above, it is also used to calculate some financial ratios.