Tuesday, April 21, 2009

Market Cap and Free Float Method

Most of you must have come across data pertaining to top companies. Many institutions and prestigious magazines publish such data every now and then. While deciding about a company’s position and size, few parameters are used. One of them and the most common one is market capitalization. Other parameters could be sales figure, net profit, or gross profit. Talking about market capitalization, it basically refers to multiplication of number of shares of a company and market value of each share. For example, if company X has total 1 million shares and per share value is Rs 50 then market capitalization of company X will be 50 multiplied by 1 million and that comes to Rs 50 million.

If we talk about market capitalization in terms of index then all the stocks listed in the index has a certain weight attached to it. This weight depends upon the market capitalization of the particular company. More the weightage of a company, higher the chances of it impacting the index. Also known as full market capitalization methodology. One more term that will help us knowing this concept even better is free float weightage. It refers to the fact that not the entire lots of shares are taken into consideration while giving weightage to the company in the index.

That’s because not all the shares are for trading. A good percentage of the shares are unavailable for trading because they are held by promoters or FII or government. In such case, the number of shares available for trade is multiplied by share prices and that’s how weightage of the stock is decided. India stock exchange; BSE use free-float method whereas NIFTY uses market cap method.