The free-float methodology is a way of calculating market capitalization that takes into account only the portion of a company’s shares that is available for trading in the open market. This method excludes shares that are closely held, restricted, or otherwise not available for regular trading. The idea is to provide a more accurate representation of the company’s public market value, reflecting the shares that are actively bought and sold by investors.

Key components of the free-float methodology include:

1. **Definition of Free Float:**
– The free float is the portion of a company’s total outstanding shares that is available for trading in the open market. It excludes shares held by insiders, strategic investors, and other entities whose shares are not typically traded on the open market.

2. **Calculation of Market Capitalization:**
– The market capitalization of a company is traditionally calculated by multiplying the total number of outstanding shares by the current market price per share. However, when using the free-float methodology, the calculation uses only the free-float shares.

\[ \text{Market Capitalization} = \text{Free Float Shares} \times \text{Market Price per Share} \]

3. **Importance of Free Float:**
– The free-float methodology is considered more reflective of the company’s true market value because it focuses on the shares that are actively traded. Shares that are closely held or restricted are less likely to impact the stock’s market price due to their limited availability for trading.

4. **Determination of Free Float:**
– The determination of free float involves identifying and subtracting shares that are not actively traded. This can include shares held by company insiders, strategic investors, government entities, and certain institutional investors.

5. **Uses in Index Calculation:**
– Stock market indices often use the free-float methodology to calculate the market capitalization of index constituents. This approach is particularly common in indices where the goal is to measure the performance of the actively traded portion of the market.

6. **Volatility and Liquidity Considerations:**
– Investors may use free-float market capitalization to assess a stock’s liquidity and volatility. Stocks with a higher free-float market capitalization are generally considered to have higher liquidity and may experience less price volatility.

7. **Adjustments Over Time:**
– The free-float shares of a company can change over time due to factors such as new share issuances, share buybacks, or changes in ownership structure. Periodic adjustments are needed to ensure the accuracy of free-float market capitalization calculations.

8. **Global Standardization:**
– The use of free-float market capitalization has become a global standard in financial markets, providing a consistent and comparable measure of a company’s market value across different regions.

The free-float methodology is widely used in financial markets and is considered an essential tool for investors, index providers, and analysts seeking a more accurate representation of a company’s market capitalization and performance.