What exactly is a public float and why is it so important?

Stock Market

What exactly is a public float and why is it so important?

07 Feb 2023 Zinkpot 149

Business Standard - Any listed company has to ensure that at least 25% of its shareholding is with the public at large. Shares held by non-promoters - be it retail investors, mutual funds, foreign portfolio investors (FPIs) and insurance companies are called public float or public shareholding. Shares held by entities or individuals that incorporate the company and/or exercise control over the company are categorised as promoter shareholding. Read more

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In the view of stock markets, the public float or free float represents the portion of shares of a corporation that are in the hands of public investors, on the contrary to locked-in shares held by promoters, company officers, controlling-interest investors or governments.
These numbers are sometimes seen as a better way of calculating market capitalization because it provides a more accurate reflection of what public investors consider the company to be worth.
The float may also refer to all the shares outstanding that can be publicly traded.
This free float is calculated by subtracting the locked-in shares from outstanding shares. To illustrate, a company may have 10 million outstanding shares, with 3 million of them in a locked-in position. This company's float would be 7 million.
Public float vs shares outstanding - Shares outstanding is the total number of shares issued and actively held by stockholders. Floating stock is the result of subtracting closely-held shares from the total shares outstanding to provide a narrower view of a company's active shares.
More volatility is seen in stocks with smaller floats than those with larger floats. In general, the large holdings of founding shareholders, corporate cross-holdings and government holdings in partially privatised companies are excluded when calculating the size of a public float.
Advantages of public floating - By offering a public float, companies gain access to new and large capital, as the general public can invest in the company. This new capital is then used to increase the company's profits.
Public floating facilitates a company's access to interest free capital as there is no interest to be paid on shares. Though a dividend may be involved, the terms of dividend liability are far more flexible than terms for loans.
Moreover, shares are not considered as a debt, and by public floating, companies can reduce their debts creating a better asset to liability ratio.
By public floating, companies can enhance their credit image. Sometimes favourable terms are also offered by credit providers because of public limited companies status. Along with enhanced credibility, companies can also get higher media coverage and attention of general public.
Disadvantages of public floating - In the face of public floating, companies are vulnerable to threats of speculations and market fluctuations.
Costs of company registrations are also very high, making it difficult for certain small businesses to float shares. Along with higher costs, processes of registering and running a company are also very complex. Along with these costs, taxes are also to be paid while a company is public floating.
Public floating also increases pressure on a company to perform. Whenever the general public, as company shareholders, demand dividends without keeping the company's economic circumstances in proper perspective, it increases performance pressure on the company. Secondly, sometimes companies provide false financial reports to sell shares which lead towards further complications in the market.