Importance of Free float

The S&P 500 index in the US and the BSE 500 index in India are two major stock market indices, but they have significant differences, particularly in their free float market capitalization. Free float market cap refers to the portion of a company’s shares that are available for public trading. In the case of the S&P 500, the free float is more than 90%. This means most shares are available for trading by the public, with very few held by promoters or other entities.

The Situation in the Indian Market

In India, the situation is quite different. For the BSE 500, the free float market cap is only around 40 to 50%. This means that more than half of the shares are held by promoters or other entities and are not available for public trading. As a result, the Indian market tends to be less liquid, and the shares that are available for public trading can be more volatile.

Impact of Low Free Float on Stock Prices

A key example of this is the recent rise of Adani stocks. One of the reasons these stocks surged was the lack of free float. With fewer shares available for public trading, even small amounts of buying can push prices up significantly. This limited supply of shares in the market makes it easier for prices to rise quickly when there is demand. On the other hand, if there is a lack of buyers, the prices can also fall quickly.

The Role of Regulations in Free Float

SEBI, the Securities and Exchange Board of India, has recognized this issue and introduced regulations to ensure that at least 25% of a company’s shares must be available for public trading. While this has improved the situation somewhat, the free float in Indian markets is still much lower compared to more developed markets like the US. This limited availability of shares makes the Indian stock market less liquid and can lead to higher volatility in stock prices.

Why Free Float Matters

The low free float in the Indian market is one of the reasons why stocks here often trade at higher valuations compared to markets like the S&P 500. In the US market, with such a large percentage of shares available for public trading, the market is much deeper and more liquid. This makes it one of the most stable and liquid markets in the world, with stock prices reflecting more accurate valuations.

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