Free-Float Methodology  

The free-float methodology is a widely used in stock market analysis and index construction. It calculates a company’s market capitalisation based only on shares available for public trading, excluding locked-in shares held by insiders, governments, or promoters. This methodology accurately represents market activity, helping investors assess liquidity, volatility, and stock performance. This guide aims to provide a clear and concise understanding of the free-float methodology, covering its definition, significance, advantages, disadvantages, and practical applications. 

What is Free-Float Methodology? 

The free-float methodology calculates a company’s market capitalisation by considering only the shares available for public trading. Unlike the full-market capitalisation method, which includes all issued shares, the free-float approach excludes shares restricted or held by insiders, promoters, or governments. 

The formula for calculating free-float market capitalisation is: 

Free – Float Market Capitalisation = Share Price* (Total Shares Issued-Locked- In Shares) 

For example, if a company has 1,000,000 total shares priced at US$50 each, and 200,000 of these shares are held by insiders and not available for public trading, the free-float market capitalisation would be: 

50*(1,000,000 – 200,000) = US$4,00,00,000  

Major indices, such as the S&P 500 and FTSE 100, employ this methodology to provide a more accurate reflection of market trends. 

Understanding Free-Float Methodology 

The free-float methodology focuses on shares actively traded in the market, known as “free-floating shares.” It excludes: 

• Insider Holdings: Shares held by company insiders, such as executives or board members. 

• Government Holdings: Shares owned by governments or promoters. 

• Restricted Shares: Shares that cannot be sold without meeting specific conditions. 

By excluding these locked-in shares, the free-float methodology ensures that only publicly traded stocks contribute to the company’s market capitalisation, offering a clearer picture of investor sentiment and market dynamics. 

Importance of Free-Float Methodology

The free-float methodology has gained prominence globally because it provides better insights into market trends and investor behaviour. Its importance is underscored in several key areas: 

• Accurate Market Representation: By excluding locked-in shares, it reflects only those stocks that are accessible to investors, offering a more realistic measure of market activity. 

• Index Construction: Many significant indices, including the S&P 5

Advantages and Disadvantages of Free-Float Methodology 

Advantages 

1. Improved Accuracy: Focusing on actively traded shares provides a more realistic measure of market activity, leading to indices that better reflect actual market conditions.
2. Liquidity Assessment: This helps investors gauge a stock’s liquidity based on its free-float percentage, aiding in investment decisions.
3. Reduced Index Concentration: Prevents large companies with low free floats from disproportionately influencing index movements, leading to a more balanced representation.
4. Global Acceptance: It has been widely adopted by significant indices like the MSCI World Index and NASDAQ-100, enhancing its credibility and standardisation.

Disadvantages 

1. Market Manipulation Risk: Companies with low free floats are more susceptible to price manipulation due to the limited supply of shares available for trading.
2. Limited Institutional Interest: Due to reduced liquidity, institutions may avoid stocks with low free floats, limiting investment opportunities.
3. Exclusion of Strategic Shares: This method may not fully represent a company’s total value by ignoring locked-in shares, potentially overlooking strategic holdings that could influence company decisions.
4. Potential Underestimation of a Company’s True Value: Since the methodology excludes restricted shares, it may undervalue a company’s

Example of Free-Float Methodology 

In Singapore, companies listed on the Singapore Exchange (SGX) must maintain a minimum % free float of 10%, meaning at least 10% of their shares must be available for public trading. This requirement ensures sufficient liquidity and market participation. 

Lian Beng Group Ltd. 

In July 2023, Lian Beng Group Ltd., a construction and engineering company, announced that its public shareholding had fallen below the 10% threshold. As a result, the SGX suspended trading of Lian Beng’s shares at the close of the privatisation offer on July 7, 2023. This suspension underscores the importance of adhering to free float requirements to maintain market liquidity and investor confidence.  

Great Eastern Holdings Ltd. 

Similarly, in June 2023, Great Eastern Holdings Ltd., a leading insurance company, saw its free float drop below 10% after its parent company, Oversea-Chinese Banking Corporation (OCBC), increased its stake to over 90%. This reduction in public shareholding prompted concerns about the company’s continued compliance with SGX’s listing requirements and potential trading suspension if the free float is not restored.  

These examples highlight the critical role of the free-float methodology in ensuring that a sufficient proportion of a company’s shares are

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