Free-float m-cap gives better liquidity

Market capitalisation (m-cap) is one of the key indicators investors use while investing in stocks.The market price of the company is generally the public opinion about the company.  The market price of the company is based on factors like  financial performance, economic indicators like GDP, inflation, etc.

In addition, investors also have to look at the free-float market capitalisation when investing in stocks. When a company issues shares, some portion of it is held by the promoters or government, strategic holding and other locked-in shares, which is not open to public trading. The portion of shares that is publicly traded is referred to as the ‘free float’ of the company. It considers only those shares readily available for trading, hence lower than total m-cap.

A high free-float ensures better liquidity and may attract higher institutional participation. Institutional investors prefer to invest in stocks with a large free float, as they can purchase or sell a significant number of shares without heavily impacting the share price.  A company’s free float is important to potential investors because it offers insight into the company’s stock volatility. Stocks with smaller free float see higher price volatility thta calls for caution while investing.

M-cap plays an important role in determining where to invest, expected returns and your risk appetite.

KNOW BETTER

• Portion of shares that is publicly traded is referred to as the ‘free float’ of the company
   
• High free-float ensures better liquidity and higher institutional participation

The writer is chief investment officer, LIC Mutual Fund