Forget Market Cap in Trading

Free Float Matters

First let's understand what market capitalization and free float is and the difference between them.

Market capitalization is nothing but a measure of a company's total value based on its outstanding shares and the current price of those shares.

MCap = Current share price * The total number of outstanding shares.

Free float refers to the shares of a company that are publicly traded and available for investment by the general public. It's essentially the number of outstanding shares excluding those held by insiders, promoters, or government entities, which are typically locked in and not freely available for trading.

Free Float (FF) = Current share price * No. of shares that can be publicly traded.

Now if you're seeing the market cap of the company that means indirectly you're seeing liquidity. For example, if you say I don’t want to trade stocks less than 100 Cr or something. That indirectly means you don’t want illiquid stocks. Now based on this can we come to the conclusion that Mcap is used for liquidity? And some people use it for upper limits like “I don’t want stocks more than 25K Mcap or something” If you're saying or using something like this then again, it’s nothing but using it as upper limit of liquidity. Hence Mcap is used for liquidity mostly.

Now instead of using 2 liquidity filters in your scanners just use one. Most probably you would have already been using something similar to ART (Average Rupee Turnover) which is volume based.

Second reason why Mcap is used is to gauge the size of the company. Now let's understand with an example or let me tell you how I look at it. Considering FACT as an example, As of today Mcap of it is 50,171 Cr and free float is 722 Cr as shown in below chart. Now if this stock has to move 10% how much should come into this stock or lets say how much should be invested? It's just 72 Cr. I hope you agree because as per free float, that is publicly available shares and its current price. This is the metric we have to see to compare the size of the stock and not MCAP.

And this metric is not something that is quantifiable. What I mean by that. Tell me which EMA is better, is it 20 or 21 period? You can’t exactly quantify it because of subjectivity involved. Similarly for FF it's hard to come to one number. So, I just think like, lower the better because lower the float bigger the move with less money invested. So, MCAP doesn't give you the right picture with respect to size.

We will take another example from the same theme and understand why MCAP is useless and free float matters when you're comparing the size of the company.

As shown above, the MCAP of DEEPAKFERT is 15,741 Cr and free float is 7774 Cr. Based on this, if this stock has to move 10% then 777.4 Cr should be invested. Now if we compare FACT and DEEPAKFERT MCAP that is 50,171 Cr and 15,741 Cr based on this if you trade thinking DEEPAKFERT will move big compared to FACT then you're wrong. Instead, based on free float if you compare the size of the company, you will see FACT stock requires far less than DEEPAKFERT that is just 72 Cr compared to 777.4 Cr respectively, even though MCAP of this stock is 3 times smaller but we can expect bigger move in FACT because the amount required to move is far lesser then what DEEPAKFERT needs. Hence MCAP is not useful, instead see free float to choose or prioritize stocks one over other.

Summary,

• If you're using MCAP in the scanner as a filter, then it’s nothing but for liquidity. So, just stick to the liquidity filter based on volume.

• When comparing the size of the company while prioritizing stocks one over other, compare it with free float instead of MCAP because that is what matters.

• There is no right number for FF; it's just lower the better.

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