What is Free-Float Market Capitalization?

-    Free-float is defined as the total number of shares, which are actually available for day-to-day trading (hence this excludes shares locked with promoters, institutional investors, government etc)
-    Multiplying the number of free-float shares of a company with the current market price gives us the value of free-float market capitalization (FFMC)
-    How is this used?
o    Suppose in base year, FFMC of A: Rs.100,forB:  Rs.200 and so on, adding up to overall FFMC for all 30 companies in the index: Rs.1000
o    Base value of the index: Rs.100
o    Establish a proportional relationship between base value and FFMC (termed as index divisor) by equating the overall FFMC (Rs.1000) to value of the base (100 points)
o    Hence, each Rs.10 of FFMC is worth 1 point in terms of base value of the index
o    In other words, if market cap rises by Rs.100, index should rise by 10 points

Free-float market capitalization defines how much money will be required if one were to buy all the shares of a company that are available for trading

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Base Market capitalization Adjustment

The formula for adjusting the Base Market capitalization is as follows:

New Base Market capitalization = Old Base Market Capitalization x New Market Capitalization / Old Market Capitalization

To illustrate, suppose a company issues right shares, which increases the market capitalization of the shares of that company by say, Rs.100 crores.  The existing Base Market capitalization (Old Base Market capitalization), say is Rs.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 crore.  The “New Base Market capitalization” will then be:

New Base Market capitalization = 2450 x (4781 + 100) / 4781 = Rs.2501.24 cr

This figure of Rs.2501.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary

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