Free float

The free float of a company is the proportion of shares that are held by investors who are likely to be willing trade. It is a measure of how many shares are reasonably liquid. It therefore excludes those shares held by strategic shareholders.

Strategic shareholdings typically include those of directors and those connected to them as well as shares held by parent companies and others who have links with the company that go beyond those of a portfolio investor.

Indices such the FTSE 100 are adjusted for the free float, so that companies are weighted by the total value of shares that are actually available to portfolio investors (i.e. market cap ×free float or a similar weighting) rather than the total market cap.

This is useful for performance measurement as it provides a benchmark more closely related to what money managers can actually buy.

Free float tends to be a much more important issue for smaller companies which commonly have several strategic shareholders and where directors shareholdings can be a significant part of the total share capital.

It is unusual for director's shareholdings in large companies to be large (in proportion to market cap), and there are fewer other strategic shareholders (other large shareholders tend to be fund managers) than in smaller companies.

Free float is rarely an issue for private investors except for companies that are both very small and closely held. It can be very important to institutional investors.

How to calculate free float

Calculating a company's free float to reasonable accuracy is not intrinsically at all difficult, but can require some care.

A company's annual report will contain a list of its largest shareholders and of director's shareholdings. Significant changes to these are also reported through announcements.

It is therefore possible to calculate a reasonably accurate free float estimate simply by:

  1. Going through the annual report and identifying the strategic shareholders.
  2. Collating their shareholdings and updating the totals by looking at relevant company announcements.
  3. Summing the resulting updated shareholdings.
  4. This total divided by total shares in issue is the percentage that is not free float. Subtracting this from 100% gives us the free float.

Although this can be a little tedious, the only real difficulty lies in identifying which of the major shareholders we should regard as strategic. Clearly another company in the same industry, a director, or a parent company will not sell their shares as lightly as a normal portfolio investor.

Fund mangers are usually portfolio investors. Some financial institutions have both fund management arms and private equity arms. It is usually clear which is the shareholder, but it is easy to make a mistake here.

A similar problem can arise with individuals with large shareholdings. Unless the individual is a director it may be difficult to tell what the nature of their interest is.