Free float: What it is, how to calculate it, and its uses
At a glance:
• The term ‘free float’ is used to describe the percentage of a company’s shares that are available for trading.
• It is a key indicator when it comes to assessing liquidity, volatility, and inclusion in stock market indices.
• At Carregosa NextGen, we show you how to include this indicator when doing your investment analysis.
Did you know that two companies with the same market capitalisation can have quite different weightings in the stock market? This difference may be due to the free float, which is an indicator that influences liquidity, volatility, and even whether or not a company is included in indices tracked by ETFs and investment funds.
If you want to make more informed investments and better understand how shares move in the market, it is essential to understand free float. This article explains what free float is, how it is calculated, and how it can affect your investment strategy.
What is a free float?
The term free float (which can be translated as 'shares available for trading on the stock market') represents the percentage of a company's shares that are actually available for trading.
It does not include strategic or stable shareholdings, such as:
• State holdings;
• Shares held by founders or controlling shareholders;
• Long-term qualifying holdings;
• Treasury shares.
Put simply, the free float refers to the shares that are dispersed across the market and can be bought and sold freely by institutional and retail investors.
This indicator is particularly relevant because it shows the number of shares that are actually available for trading, rather than just the total number of shares that have been issued.
Many stock market indices do not weight companies solely on the basis of their total market capitalisation, but rather on their free-float-adjusted market capitalisation. This means that the index only considers the portion of the company that is actually available for trading on the market.
Formula
Adjusted capitalisation = Total market capitalisation × free float percentage
Imagine two companies with the same market capitalisation of €10 billion: Company A with a free float of 90% and Company B with a free float of 30%.
Although they are the same size overall, only some of Company B’s shares are available to trade; most are held by a controlling shareholder or strategic investors. When adjusted for free float, Company A is valued at €9 billion, while Company B is valued at €3 billion. Consequently, Company A will have a much greater weighting in the index.
This method ensures that indices accurately reflect the capital available for investment and the market’s true liquidity, making them more representative of the needs of both retail and institutional investors.
How is the free float calculated?
The free float can be presented as a percentage or as an absolute value.
Formula
Free float (%) = (Shares available for trading / Total shares issued) × 100
Practical example
Imagine a fictional company with the following scenario:
• Total shares issued: 1,000,000
• Shares held by the Founder: 600,000 (60%)
• State shareholding: 100,000 (10%)
The calculation: 1,000,000 (Total) – 600,000 (Founder) – 100,000 (State) = 300,000 shares.
In this case, the free float is just 30%. Although the company has one million shares, only 300,000 of these make up the maximum trading pool. This suggests that the security’s actual liquidity is more limited than its total market capitalisation indicates. However, it is important to note that the free float determines the maximum supply: the actual daily liquidity also depends on the volume of transactions within this 30% share. If these 300,000 shares are not sold, liquidity will be low, regardless of the size of the float.
Free float on the PSI: Real examples
To understand how capital dispersion shapes the dynamics of a listed company, we analysed two distinct examples from the national benchmark index: Galp and Ibersol. These examples illustrate the direct impact of this indicator on liquidity and volatility:
| Characteristic | High Dispersion (e.g. Galp) | Core Shareholders (e.g. Ibersol) |
|---|---|---|
| Shareholder Structure | Capital is mostly held by institutional and retail investors. | A large proportion of shares held by founders or strategic shareholders. |
| Liquidity | High: A large volume of shares available makes buying and selling easier. | Low: Fewer shares in circulation can make it difficult to execute orders. |
| Volatility | Tends to be more stable with medium-sized orders. | More sensitive to capital inflows or outflows, which can lead to sharp fluctuations. |
| Free Float | Relatively high by PSI standards, reflecting its total available market capitalisation. | Adjusted for the low float, reducing its influence on the PSI. |
Recommended reading
Understanding free float is also key to grasping how major market indices are constructed. In fact, this is one of the main selection criteria for companies to be included in most benchmark indices, such as the S&P 500 or our PSI. Find out more about how the Top 10 Stock Market Indices work and their importance in our article.
Advantages of analysing the free float
Understanding the percentage of dispersed capital is not just a statistical exercise; it is a risk management tool. By incorporating this indicator into your analysis, you gain precision in four key areas:
Measuring effective liquidity
More than looking at average daily volume, the free float allows you to measure real liquidity. A company may have millions of shares issued, but if only 10% circulate on the market, your ease of entering or exiting a position (without crushing the price) is much lower than the numbers suggest.
Calibrating exposure to volatility
The free float acts as a market seismograph. By analysing this data, you can anticipate the price sensitivity to large orders: shares with low dispersed capital are technically more prone to sharp variations in response to capital inflows or outflows. This reading allows you to adjust the "size of your bet" to the structural stability of the security.
Reading the weight in passive indices
As most major indices (and the respective ETFs that replicate them) use free-float-adjusted capitalisation, this analysis allows you to understand "automatic demand". If a company has a reduced float, it will have less weight in the indices and, consequently, attract less capital from passive funds, which impacts its potential for appreciation.
Mapping the shareholder structure
By subtracting the free float from the total capital, you gain transparency about who controls the company. This allows you to map whether control is in family groups, the State or strategic investors. This reading is crucial to understanding whether management is aligned with minority shareholders or responds to the long-term interests of a "hard core".
Limitations of analysing the free float
Although the free float is an important indicator, analysing it in isolation is not enough to support an investment decision. It is essential to frame it within a broader financial analysis.
It does not replace fundamental analysis
The free float provides information on shareholder dispersion and liquidity, but says nothing about the quality of the business, profitability, growth or financial strength of the company.
It can generate simplistic interpretations
A high free float does not automatically mean lower risk, just as a low free float does not necessarily imply greater instability. In some cases, a concentrated shareholder structure can contribute to strategic stability and long-term alignment.
It is not insurance against market risk
It is crucial to understand that a high free float, although it offers greater liquidity, does not immunise the security against generalised volatility. In moments of financial panic or macroeconomic crises, selling pressure affects all assets. The indicator helps you map the specific volatility of that company (idiosyncratic risk), but does not cancel out systemic market risk.
Attention: Shares with a very low free float are more susceptible to extreme price variations in short periods of time, as few buy or sell orders can quickly unbalance the market.
Alternatives to free float: Other relevant indicators
The free float is an important indicator for understanding liquidity and shareholder dispersion, but it should not be analysed in isolation. A rigorous assessment requires the integration of other financial and market indicators that allow you to frame the true potential and risk of the investment.
Market capitalisation
Market capitalisation represents the total market value of the company (share price × total number of shares issued). It allows you to frame the size of the company and its relative positioning in the market. Large-cap companies tend to show greater stability and analyst coverage, while smaller companies may offer greater growth potential but also greater risk.
Average daily trading volume
This indicator measures the average number of shares traded per day. It complements the analysis of free float by providing a practical reading of the security’s effective liquidity. Consistent volume tends to indicate greater ease of order execution without significant price impact.
Historical volatility
Volatility measures the amplitude of price variations over time. It helps to understand the level of risk associated with the share and its suitability for the investor’s profile. A share may have a high free float and still show strong volatility due to sectoral or macroeconomic factors.
Shareholder structure
More than the percentage of free float, it is important to analyse who holds the qualifying holdings. The presence of long-term institutional shareholders, founders involved in management or strategic investors can influence the stability and strategic direction of the company.
Valuation indicators (P/E, EV/EBITDA)
Ratios such as the Price-to-Earnings (P/E) or EV/EBITDA help to assess whether the company is expensive or cheap relative to its results. These indicators allow companies within the same sector to be compared and contextualise the market price in relation to profit-generating capacity.
Profitability and cash generation
Financial ratios such as ROE (Return on Equity), ROIC (Return on Invested Capital) or free cash flow are fundamental to assessing the quality of the business. A company may have high market liquidity, but if it does not generate consistent returns, the investment may not be attractive in the long term.
Free float: The informed analysis of Carregosa NextGen
Understanding free float allows you to better interpret the behaviour of a share, assess its real liquidity and correctly frame its inclusion in indices or funds.
At Carregosa NextGen, we support you in the in-depth analysis of indicators such as free float, integrating them into a complete financial assessment adjusted to your risk profile. Talk to us and find out how to make more sustained and informed investment decisions.
Free float: Frequently Asked Questions
Below we answer the most common questions about free float.
1. What does "free float” mean in Portuguese?
"Free float” can be translated as "dispersed capital on the stock market” or "freely circulating shares”. It refers to the shares available for trading on the market.
2. Does the free float influence the share price?
Indirectly, yes. A reduced free float can increase volatility and amplify price movements due to lower liquidity.
3. What is the difference between issued shares and free float?
Issued shares represent the total shares of the company. The free float corresponds only to those available for trading.
4. Why do indices use free-float-adjusted capitalisation?
To reflect only the part of the company that is effectively available for investment in the market.
5. Where can I check the free float of a listed company?
You can check it on the GoBulling Trading Platform of Banco Carregosa. We have a Demo Version so you can familiarise yourself with the platform, which does not necessarily fully reproduce real execution conditions. You can try it here.
Disclamer: This article has been prepared by Banco Carregosa for informational and educational purposes only. It does not constitute, under any circumstances, an investment proposal, purchase recommendation or personalised financial advice. Investing in financial instruments involves risks, including the possibility of losing the invested capital. Past performance is not a guarantee of future performance. We recommend that you consult an account manager or financial advisor before making any investment decision, to ensure that it is suitable for your risk profile and financial objectives.