Free Float of Shares: Understanding Its Meaning and Importance in Investment

What is Free Float of Shares?
Free float of shares refers to the number of a company's shares available for trading by the public on the stock market. These shares are owned by investors who are not affiliated with management or controlling shareholders, allowing for freer trading. Typically, shares held by the company's founders, board members, or large institutional investors are not counted as free float.

Why is Free Float Important?

Market Liquidity
The higher the free float of a share, the easier it is for that share to be traded in the market. This means that the share price is more stable due to the presence of many buyers and sellers involved in transactions. Conversely, shares with a low free float tend to be more volatile because price movements can be influenced by fewer transactions.

Involvement of Retail Investors
A high free float provides opportunities for more retail investors to purchase those shares. This can have a positive impact on the company as it creates a perception that the shares are more "open" to public investors, rather than being controlled by a handful of parties.

Impact on Indices
In several stock indices, such as the LQ45 Index on the Indonesia Stock Exchange, free float is one of the criteria for stock selection. Shares with a high free float are more likely to be included in this index, as they are considered to better represent the market overall.

Conclusion
Free float of shares is an important indicator that investors need to pay attention to. The larger the free float, the higher the liquidity of the shares, which means better opportunities for investors in terms of price stability and ease of transactions. As an investor, it is crucial to consider free float in your investment strategy, especially when choosing shares with high liquidity and long-term growth potential.