Float-Adjusted Market Capitalization is a metric used to assess a company’s market value by adjusting the total market capitalization to exclude shares that are not readily available for trading. This makes it a more accurate measure for investment purposes, as it focuses on the liquidity and actual trading potential of the equity.
Definition and Calculation
Float-Adjusted Market Capitalization (FAMC) subtracts restricted shares, such as those held by executives, directors, and other insiders, from the total number of outstanding shares. It is calculated as follows:
Types of Restricted Shares
Insider Holdings
These include shares owned by executives, boards of directors, and employees that are subject to restrictions.
Shares Held by Governments
Certain shares held by government institutions can also be excluded if they are not intended for public trading.
Strategic Holdings
Some strategic holdings by other companies may also be excluded if these shares are unlikely to enter the trading market.
Historical Context and Importance
Initially, the concept of market capitalization did not account for the availability of shares for trading. Over time, investors recognized that the market cap did not offer a realistic value due to shares that were not readily tradeable. This led to the refinement and adoption of Float-Adjusted Market Capitalization to provide a more practical valuation tool.
Applicability In Modern Markets
Float-Adjusted Market Capitalization is pivotal in modern markets for the following reasons:
- Index Inclusions: Major indices like the S&P 500 use the FAMC for including stocks, due to its focus on liquid shares.
- Investment Decisions: Investors rely on FAMC to understand a company’s market value, minimizing the distortions caused by non-tradable shares.
- ETF Weightings: Exchange-Traded Funds (ETFs) use FAMC to allocate investments more accurately.
Comparisons with Other Metrics
Market Capitalization
The standard market capitalization calculates by multiplying the share price with total outstanding shares, without excluding restricted shares.
Free-Float Market Capitalization
Similar to FAMC, but it primarily excludes shares held by insiders, governments, and other entities that are always out of trading circulation.
Related Terms
- Market Capitalization: The total value of a company’s outstanding shares of stock.
- Free-Float: The shares of a company that are held by many public investors and are freely traded on the stock exchanges.
- Liquidity: The degree to which an asset can be quickly bought or sold in the market without affecting its price.
- Restricted Shares: Shares that cannot be fully traded until certain conditions have been met.
FAQs
Why is Float-Adjusted Market Capitalization important?
Is Float-Adjusted Market Capitalization the same as Free-Float Market Capitalization?
How does Float-Adjusted Market Capitalization impact index composition?
References
- Fama, Eugene F., and Kenneth R. French. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 1992.
- Bodie, Zvi, Alex Kane, and Alan J. Marcus. Investments. McGraw-Hill Education, 2017.
- MSCI. “MSCI Global Investable Market Indexes Methodology,” November 2021.
Summary
Float-Adjusted Market Capitalization offers investors a refined and realistic measure of a company’s market value by excluding shares that are not available for public trading. It plays a crucial role in index inclusions, investment decisions, and ETF allocations, ensuring that market analyses and investments are based on liquid shares, thereby providing a clearer picture of a company’s valuation.
