Free float
The part of a company's shares readily available for trading — broadly, what is not locked up with promoters. Indices, position limits and MWPL are all measured on it.
In plain language
A company's shares are held by many kinds of owner — promoters, institutions, other corporates, individuals. Not all of those shares are ever likely to come to market. A promoter holding a controlling stake is not a seller on an ordinary Tuesday.
The workbook calls the portion that is available for immediate trading the free float. Compute an index using each stock's free-float market capitalisation instead of its full market capitalisation and you get a free float market capitalisation index.
The point is realism. A company can be enormous on paper while very little of it actually trades. Weighting it by its full size would let a thinly traded giant push the index around far more than its tradable supply justifies. Weighting by free float measures what the market can actually buy and sell.
The workbook notes that a majority of stock indices globally have moved to a free float basis over time, including the Indian equity indices Sensex, Nifty and SX40.
How it works
Free float matters far beyond index weights. The derivatives paper uses it as the yardstick for how much of a stock the derivatives market may hold:
| Rule (Chapter 7, section 7.7) | Measured on free float |
|---|---|
| Market-wide position limit (MWPL) for stock F&O | 20% of the number of shares held by non-promoters — "20% of the free float in terms of the number of shares" |
| Client-level position limit in a stock | Higher of 1% of the free float market capitalisation (in number of shares) or 5% of open interest in all derivative contracts on that stock, per exchange |
| Trading-member position limit in a stock | 20% of the applicable MWPL per exchange |
So the free float is the anchor for the whole position-limit chain in single-stock derivatives. It is also why the non-benchmark index tranche illustration in Chapter 2 notes that a constituent's weight drifts as relative price moves change its free-float market cap.
The formula
Free float market cap = Free-float shares × Current market price
MWPL (stock) = 20% × Non-promoter shares
A worked example
Start from the workbook's own company: ABC Ltd, 5,00,00,000 shares at Rs 120, full market capitalisation Rs 600 crore.
The promoter holding below is an illustrative assumption, not a workbook figure. Suppose promoters hold 60%:
Promoter shares = 60% × 5,00,00,000 = 3,00,00,000
Free-float shares = 5,00,00,000 − 3,00,00,000 = 2,00,00,000
Free float market cap = 2,00,00,000 × 120 = Rs 240 crore
In a full market-cap index ABC counts at Rs 600 crore. In a free float index it counts at Rs 240 crore — 40% of the weight.
The same free float sets ABC's derivative limits (using the workbook's percentages):
MWPL = 20% × 2,00,00,000 = 40,00,000 shares
Trading member limit = 20% × 40,00,000 = 8,00,000 shares
Client limit (free float leg)= 1% × 2,00,00,000 = 2,00,000 shares
The client limit is the higher of that 2,00,000 and 5% of the open interest in ABC derivatives on the exchange.
Why NISM asks about it
Chapter 2, section 2.3 (Types of Stock Market Indices), introduces the free float market capitalisation index and states that Sensex, Nifty and SX40 have moved to it. Chapter 7, section 7.7 (Position limits), then uses free float as the base for MWPL and the client-level limit. Expect a definition question from Chapter 2 and a percentage question from Chapter 7.
Common exam traps
- MWPL is 20% of non-promoter shares, not 20% of all shares outstanding.
- The client limit is the higher of two numbers — 1% of free float market cap or 5% of open interest — not the lower.
- Indian benchmark indices are now free float based. Chapter 2 also says they were earlier market-cap weighted; a question asking what they use today wants free float.
- Free float is about availability for trading, not about who is a retail investor. Institutional holdings that trade are part of it.
Where this is taught
- Series XXI-B · Chapter 12: Introduction to Indicesintroduced here
- Series V-D · Chapter 14: Understanding Indexintroduced here
- Series XIX-C · Chapter 10: Introduction to Indices and Benchmarkingintroduced here
- Series XIX-E · Chapter 8: Indices and Benchmarkingintroduced here
- Series VIII · Chapter 2: Understanding Indexintroduced here
Related terms
- Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
- Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
- IndexA statistical indicator that tracks a portfolio of securities representing a market or part of it, expressed as a change from a base value — so the percentage move matters, not the number itself.
- Value weighted indexAn index weighting each stock by its market capitalisation, or free-float market capitalisation, divided by the total — the most popular method, and the natural basis for index funds and derivatives.
- Free-float market capitalisationAn index-weighting method using only the shares actually available to the public — excluding promoter, government and strategic locked-in holdings — so a stock's index weight tracks its tradeable size.
- Index divisorThe number an index total is divided by — set at inception so the index starts at a convenient 100 or 1,000, then adjusted so splits and constituent changes do not move the index level.
- Stock turnover ratioA liquidity measure for a stock: the number of shares traded during a period divided by the number of free-float shares outstanding, usually taken over one year.
- Price-weighted indexAn index in which each stock counts in proportion to its share price — the sum of prices divided by the number of stocks — so a high-priced share moves it most, whatever the company's size.
- Equal weighted indexAn index where every constituent starts with the same weight; as prices move the weights drift apart, so the portfolio must be rebalanced by selling winners and buying losers.
- Market capitalizationThe market value of a company: total shares outstanding multiplied by the current market price. It sets index weights and underpins derivatives eligibility and position limits.
- Index constructionChoosing an index's constituent stocks and deciding its calculation methodology — a trade-off between diversification and liquidity, with the final inclusion call taken by an Index Committee.
- Index CommitteeThe specialised committee that generally takes the final decision on including or removing a security from a stock index, once the stock has met the index construction managers' eligibility criteria.
- Index maintenanceAdjusting an index for corporate actions — bonus issues, rights issues, stock splits, consolidations, mergers — so the index stays comparable across time; triggered by the corporate action itself.
- Index revisionA continuous exercise changing an index's composition — replacing existing constituents with new ones because the trading paradigm has shifted — distinct from maintenance, which reacts to a single corporate action.
- Descending weight structureA SEBI prudential norm requiring a non-benchmark index used for derivatives to weight its constituents in strictly falling order, so no smaller stock outweighs a larger one.