Free-Float Methodology
Candlefocus EditorThe concept of free-float methodology was first introduced by Morgan Stanley Capital International (MSCI) in 1986, when they developed their global indexes. This methodology was unique in that it gave investors a clearer picture of the real market capitalization of a company, since it excluded locked-in shares that were not freely available on the market. Locked-in shares are those held by insiders, promoters, and governments, which are unavailable for trade in the market. This means that the free-float methodology provides a more accurate representation of the company’s true market capitalization.
Today, most major stock market indexes, such as the S&P 500, FTSE 100, Dow Jones, Hang Seng, and Nikkei, use the free-float methodology for calculating market capitalization. In addition to offering a more accurate picture of the true market capitalization of a company, the free-float methodology is also used by financial analysts to evaluate the performance of a specific stock. By measuring the total value of the freely available shares of a company, investors can gain insight into its potential growth and risk.
In the wake of the global financial crisis of 2008, many companies shifted away from the full-market capitalization method and began using the free-float methodology. This is because the free-float method excludes locked-in shares, which can place a company's market capitalization in a better position and therefore provide more attractive opportunities for investors.
In conclusion, the free-float methodology is an important tool that allows investors and financial analysts to gain a better understanding of the market capitalization of a company. By excluding the value of locked-in shares, the free-float methodology provides a more precise picture of the true market capitalization of the underlying companies of a stock market index. This method is used by many major stock market indexes and is crucial for evaluating the performance of a company and its potential for growth and risk.