# Public float

(Redirected from Float (finance))

Public float or free float represents the portion of shares of a corporation that are in the hands of public investors as opposed to locked-in stock held by promoters, company officers, controlling-interest investors, or government. This number is sometimes seen as a better way of calculating market capitalization because it provides a more accurate reflection rather than the entire market capitalization.[1]

In this context, the float may refer to the entire market capitalization of the company or all the shares outstanding that can be publicly traded.[2]

## Calculating public float

The float is calculated by subtracting the locked-in shares from outstanding shares. For example, a company may have 10 million outstanding shares, with only 7 million of them trading on the stock market; this company's float would be 7 million. Stocks with smaller floats tend to be more volatile than those with larger floats. In general, the large holdings of founding shareholders, corporate cross-holdings, and government holdings in partially privatized companies are excluded when calculating the size of a public float.

## Process of public floatation

There are certain regulations to offer public floats. Though these regulations might differ from region to region. For instance in the UK in order to offer public float a company must be incoporated i-e the company must be a public limited company under UK law, Secondly the company should have 'published or filed audit accounts for atleast three year period', the company must also have trading and revenue earning records for atleast three years, the companies higher management and directors must be compitent enough to run a business at that scale, the company must show that it has a working capital for atleast 12 months, once the company is listed the business must be independent from any shareholder with controlling interest (anyone owning more than 30% of the company shares), after the company is listed atleast 25% of its shares must be in hand of general public i-e public float and the company must have a total market capitalization of £700,000 not less than that .[3] These are certain regulations to list a company in UK which can offer public float. So if a company wants to offer public float it must not violate these regulations in the UK.

By public floating, companies gain access to new and large capital as general public can invest in the company making it easy for the company to get capital.[4] This new capital is then used to increase company's profits [5] This example clearly illustrates that how by using public float companies gain access to new capital.

### Opportunities to reduce debt

By public floating company gains access to interest free capital as there is no interest to be paid on shares. Though dividend is involved but terms of dividend are far more flexible than terms for loans.[6] Along with this shares are not considered as a debt and by public floating companies can reduce their debts creating a better asset liability ratio.

### Enhancement of credibility and higher public profile

By public floating companies can enhance their credit image.[7] As banks and other credit providing institutions provide credit more often to a public limited company along with this sometimes favorable terms are also offered by credit providers because of public limited company status. Along with enhanced credibility companies can also get highre media coverage and attention of general public.[8]

### Company is open to market fluctuations

By public floating companies are vulnerable to threats of speculations and market fluctuations. As in 2008 financial crises several companies went bankrupt because of fluctuations in stock market.

### Costs of public flotation

Costs of company registration are also very high making it difficult for certain small businesses to public float. Along with higher costs processes of registering and running a company are also very complex.[9] For example in UK in order to run a public limited company all details musts be provided like who are board of directors, share holders, result of share holder votes and debentures. Along with this a comprehensive accounting record is also needed like sales and whom they are made to (until and unless its a retail business), Purchase and from are they done stock and debts all of them are necessary to be provided.[10] Along with all these costs a huge amount of taxes are also to be paid while a company is public floating. For instance in the UK a company has to pay corporation tax which is 20% if the profit per year is £300,000 or less and 21% if profit is above £300,0000.

### Pressure to perform

Public floating also increases pressure on company to perform. As general public as shareholders demand dividends without keeping economic situation in view this demand for dividend increases pressure on company.[11] Secondly sometimes to sell shares companies provide false financial reports which lead towards further complications in market. As the cases of AIG and Lehman Brothers are present, in 2005 because of improper accounting company had to pay a fine of \$1.7 billion.[12] Similar is the case of Lehman brothers which went bankrupt in 2008 and they were using a small firm to secretly manipulate its balance sheets.[13] Both of these cases illustrate that how in order to sell shares companies manipulate their financial statements and later on face the consequences as in Lehman Brothers went bankrupt in 2008 and AIG was bailed out by the U.S government in 2008.

## References

1. ^ "Free-Float Methodology". investopedia. Retrieved June 17, 2013.
2. ^ Investorwords definition
3. ^ London Stock Exchange. "A practical guide to listing". http://www.londonstockexchange.com/companies-and-advisors/listing/float/practical-guide-to-listing.pdf. London Stock Exchange.
4. ^ Ernst and Young. "EY's guide to going public". http://www.ey.com/Publication/vwLUAssets/Ernst_and_Young_guide_to_going_public/\$FILE/Guide_to_Going_Public.pdf.
7. ^ "EY's guide to going public". http://www.ey.com/Publication/vwLUAssets/Ernst_and_Young_guide_to_going_public/\$FILE/Guide_to_Going_Public.pdf. Ernst and Young. `|first1=` missing `|last1=` in Authors list (help);
9. ^ "Running a limited company". https://www.gov.uk/running-a-limited-company/company-and-accounting-records. `|first1=` missing `|last1=` in Authors list (help);
10. ^ "Running a limited company". https://www.gov.uk/running-a-limited-company/company-and-accounting-records. `|first1=` missing `|last1=` in Authors list (help);