Before understanding free-float market capitalization we need to understand two definitions which are given as follows.
1) Freely Floating Shares:- These are the shares excluding the shares held by the promoters and not available for general trading purposes.
2) Market Price Per Share:- It is the current market price of a particular share.
Free Float Market Cap:- It is defined as
No. of shares freely floating X Market price per share.
Suppose, there is a company ABC Ltd. having 100 shares in total. Out of which 28 shares are held by the promoters and 72 is for the public for general trading purposes. Refer fig.
Also, assume that the share price is Rs. 85.
Now, the market cap will be
Mkt cap = 85 X 100 = Rs. 85000
Free float mkt cap = 85 X 72 = Rs. 6120.
Q) Why are we studying this?
A) Because while calculating Nifty aur Sensex free-float market capitalization is taken into consideration.
Q) What is the holding pattern for both promoters and investors in the company?
A) There is a rule declared by SEBI that for every listed company the maximum promoter holding should be 75% and the investor holding should be at least 25%.
Q) Why promoters want to hold maximum number of shares?
A) There are two reasons for this
- Decision-making purpose – To to make a big decision you have to pass a resolution and in regulation the more number of shares you have, the good it is.
When promoters start to sell their stake in the company, it is a bad sign but you must know why they are selling.
There was a time when D-Mart crashes by 3% in a single day because the promoters were having 78% holdings at that time and SEBI says a company can hold a maximum of 75%. So, to meet the norms they sold their stake but everyone wasn’t aware of this thing and people also started to sell and the price dropped like anything but in no time the prices were up again. When people are selling at this time, you should be the one buying at this time. This is the buying opportunity.