Most of the commonly referred to equity indexes in the world use a market capitalization approach. Though it's important to note that in recent years, more and more indexes have transitioned to the so-called free float market capitalization approach. This approach represents a refined calculation where only the shares available for public trading termed as the free float are considered in determining a company's weight within an index. Let's clarify this with an example. Assume a company has issued 1 million shares, but only 300,000 of these are trading in the public domain. With each share priced at $10, the free float market cap would thus be calculated as 300,000 times $10, which gives us $3 million. The significance of this method becomes apparent when we consider the weighting of companies in a free float market cap equity index. In such an index, a company is assigned a weight proportional to its free float market cap relative to the aggregate free float market cap of all the companies within the index. Consequently, companies with a substantial free float have a greater influence on the index's performance. This approach diverges from the traditional full market capitalization method, which accounts for the total value of all shares issued by a company. The shift to free float market cap addresses several key concerns. Primarily, it leads to a representation of the market that is more aligned with the portion of shares readily tradable, thus mitigating distortions from large non-trading shareholders. Furthermore, by focusing on tradable shares, the free float market cap offers a more accurate reflection of market liquidity. This is particularly important for institutional investors who require the ability to transact significant volumes without unduly influencing market prices.

Additionally, it aligns the index composition more closely with the interests of the investing public who are primarily concerned with the tradable aspect of equities. The adoption of the free float market cap methodology has now become the global norm for major indexes, fostering consistency and comparability across international markets. Notably the S&P 500, a bellwether of US equities transitioned to this method in 2014, reinforcing its commitment to providing an index that better mirrors market dynamics and liquidity.