Float-Adjusted Market Capitalization adjusts for shares not likely to trade by excluding restricted shares, ensuring a more accurate reflection of a company's market valuation.
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.
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:
These include shares owned by executives, boards of directors, and employees that are subject to restrictions.
Certain shares held by government institutions can also be excluded if they are not intended for public trading.
Some strategic holdings by other companies may also be excluded if these shares are unlikely to enter the trading market.
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.
Float-Adjusted Market Capitalization is pivotal in modern markets for the following reasons:
The standard market capitalization calculates by multiplying the share price with total outstanding shares, without excluding restricted shares.
Similar to FAMC, but it primarily excludes shares held by insiders, governments, and other entities that are always out of trading circulation.