how to calculate market capitalization using the free float method
free float methodology is calculated as follows ffm share price x number of shares issued locked in shares the free float methodology has been adopted by many of the world s major indexes it is used by the s p 500 index by morgan stanley capital international msci world index and by the financial times stock exchange group ftse 100 index there is also a relationship between free float methodology and volatility the number of free floating shares of a company is inversely correlated to volatility typically a larger free float means that the stock s volatility is lower because there are more traders buying and selling the shares that means that a smaller free float equates to higher volatility since fewer trades move the price significantly and there are a limited amount of shares available to be bought and or sold most institutional investors prefer trading companies with a larger free float because they can buy or sell a large number of shares without having a big impact on the price price weighted vs market capitalization weightedindexes in the market are usually weighted by either price or market capitalization both methodologies weigh the returns of the indexes individual stocks by their respective weighting types market capitalization weighting is the most common index weighting methodology the leading capitalization weighted index in the united states is the s p 500 index the type of weighting methodology used by an index significantly affects the index s overall returns price weighted indexes calculate the returns of an index by weighing the individual stock returns of the index by their price levels in a price weighted index stocks with a higher price receive a higher weighting and thus have more influence on the returns of the index regardless of their market capitalizations price weighted indexes versus capitalization weighted indexes vary considerably due to their index methodology in the trading market very few indexes are price weighted the dow jones industrial average djia is an example of one of the few price weighted indexes in the market example of free float methodologysuppose that stock abc is trading at 100 and has 125 000 shares in total out of this amount 25 000 shares are locked in meaning that they are held by large institutional investors and company management and are not available for trading using the free float methodology abc s market capitalization is 100 x 100 000 total number of shares available for trading 10 million 