Not All Listed Stocks Are Investable: The Concept of Free-Float Market Capitalization

Navneet Kumar

March 24, 2021

When assessing a potential investment within a given market, investors may want to consider the difference between total and free-float market capitalization. The former indicates company size (total market value), and the latter the level of capital (equity) available for investment. The free-float calculation uses the number of outstanding shares available for trading by international investors and is used by most indexes and index providers.  

Shares may be excluded from a free-float calculation if:

• They are owned by the company, its directors, or employees or by governments or affiliated organizations
• There are regulatory limits on the number of shares available for international investors
• Local governments impose limitations on non-domestic investors for sectors or companies deemed strategic or of national interest

Looking at the MSCI North America Investable Market Index (IMI), for example, we see the difference between total market capitalization and free-float market capitalization was relatively stable throughout the period shown, as it was for the MSCI EMEA and MSCI Pacific IMI, though differences in these regions were larger. The number of securities in all three markets fell slightly between 2010 to 2012, with MSCI EMEA IMI showing the largest and most persistent decline.

When we look at the MSCI Emerging Markets IMI, however, the story changes. The difference between total and free-float market capitalization has increased over time, driven by a sharp rise in total market cap. The number of securities in the index also has grown, especially with the inclusion of China A shares, beginning in 2018. These results suggest that companies coming to market more recently may have a greater share of capital that is not accessible to international investors.

Investors can compare total and free-float market capitalization to better understand the capital structure of a company and monitor large ownership stakes, which, when sold, may impact share prices. MSCI research also has shown a link between higher free float and higher levels of corporate governance.