Free Float

A publicly listed company is divided into many small units called shares. Whoever owns a share owns a tiny part of the company. But not all of these shares are actually bought and sold. A portion is held firmly by owners who have no intention of selling: the founding family, the state, or another large corporation. The free float is exactly the remainder — that is, the portion of shares that can be freely traded on the stock exchange. In German, it is also called Streubesitz, because these shares are scattered among many small owners.

What a small free float means for the share price

The price of a share arises from supply and demand. If only a few shares are available for trading at all, small buy orders are enough to move the price sharply. Such shares therefore fluctuate more heavily. Experts say the market is then illiquid — there aren’t enough buyers and sellers for calm trading.

An example from the tech world illustrates this well. When an AI start-up goes public, the founders often sell only ten percent of the shares. They and their venture capital backers keep the remaining ninety percent. If interest in AI stocks then rises, the share price shoots up even though nothing has changed about the company itself. Such price jumps say more about the scarce free float than about the value of the company.

For small investors, the free float is also an indicator of say in decision-making. If a family holds 70 percent of the shares, it effectively decides matters alone at the shareholders' meeting. The remaining shareholders can then hardly push anything through, no matter how numerous they are.

How the ratio is calculated

The calculation is fundamentally simple. You take all issued shares and subtract the firmly held blocks. What remains is divided by the total number. With one million shares, of which major owners hold 600,000, the free float is 40 percent.

The difficult question is what counts as firmly held. Deutsche Börse, for example, excludes all holdings of five percent or more, as well as shares held by the company itself and shares subject to a contractual lock-up period. Small blocks held by funds or insurers, on the other hand, count as free float, even though they too rarely sell. The threshold is thus a convention, not a law of nature.

It’s important to distinguish this from market capitalization. That describes the total value of all shares, i.e., price times number of shares. The free float says nothing about the size of a company, only about how much of it actually circulates on the market. Both figures are often combined: free-float market capitalization counts only the tradable portion.

Free float in indices and market news

Stock indices such as the DAX or the Nasdaq 100 bundle many companies into a single metric. How heavily a company is weighted within it today mostly depends on the free float. A corporation whose shares belong almost entirely to a family therefore counts for less in the index than its size would suggest. This way, the index is meant to reflect the tradable market.

In the news, the term appears especially in connection with IPOs. Phrases like “only 8 percent free float” are a warning sign of strong fluctuations. You also read about it in takeovers: when an investor buys up shares, the free float shrinks, and at some point a company can drop out of the index.

A common misconception: a high free float doesn’t automatically mean a good stock. It only indicates how much is traded — not whether the business model holds up. Conversely, companies with a strong major shareholder aren’t bad, but are often managed with a longer-term view. The free float is structural information, not a judgment of quality.