Float-Adjusted Capitalisation Weighting
Modern indices weight companies by the shares that can actually trade, not total shares outstanding — a rule that keeps index funds from chasing stock nobody is willing to sell.
Prerequisites: How an Equity Index Is Built
A company's total market capitalization is its share price times all shares outstanding. But not all of those shares are available to an ordinary investor: founders, governments, and other companies often hold large blocks they have no intention of selling. Float-adjusted capitalization weighting builds an index using only the shares that are freely tradeable — the "float" — rather than the full share count, so an index's weights track what investors can actually buy, not what technically exists.
The reasoning is practical. If an index weighted a tightly-held company by its full market cap, index funds tracking it would need to buy a large position relative to the small pool of shares actually for sale, pushing up the price they pay and making the fund's holding illiquid to unwind. Float adjustment fixes this by scaling down the weight of any company where a meaningful chunk of shares is locked up — held by founders, the state, another corporation, or under legal restriction.
Worked example
Two companies both have a share price of $100.
| Company | Shares outstanding | Founder/government held | Float shares | Full market cap | Float-adjusted cap |
|---|---|---|---|---|---|
| A | 500m | 10% | 450m | $50.0bn | $45.0bn |
| B | 500m | 65% | 175m | $50.0bn | $17.5bn |
Both companies have identical full market caps of $50bn, so a total-market-cap index would give them equal weight. But Company B has 65% of its shares locked up by an insider, leaving only $17.5bn of float-adjusted value — less than 40% of Company A's. A float-adjusted index gives Company A more than double the index weight of Company B, even though their headline market caps are identical.
Float-adjusted weighting scales a company's index weight by the fraction of shares actually available to investors, so tightly-held companies get smaller weights than their headline market cap alone would suggest.
Float percentages are typically published in fixed bands (for example, in 5% increments) rather than exact figures, and are reviewed periodically as insiders sell down, buybacks retire shares, or a government privatizes a stake — each of these events changes a company's index weight even if its share price and share count don't move.
When a founder or government sells down a stake, watch for the follow-on effect on index weight, not just the headline sale. A large secondary sale can push a company's float band up a notch, which mechanically increases its weight in every float-adjusted index that holds it — forcing passive funds to buy more of the stock even though nothing about the business changed.
The distinction matters most for state-linked companies and family-controlled conglomerates, where the free-float share can be a small fraction of the total — sometimes under 20% — so the difference between full-cap and float-adjusted weight is not a rounding error but the difference between one of the largest positions in an index and a comparatively minor one.
Further reading
- MSCI, Index Calculation Methodology