Here's a question I like to ask investors at financial literacy workshops in Karachi:
"If OGDC - Oil and Gas Development Company - is one of the largest companies in Pakistan by total market capitalisation, why does it often have a smaller weight in a broad-market ETF than a bank like HBL, which is technically a smaller company?"
Most people pause. A few guess correctly. The rest are surprised when they learn the answer, because it reveals something fundamental about how indices and the ETFs that track them and how they actually work. It comes down to a concept called Free Float Market Capitalisation.
Total Market Cap vs. Free Float: The Critical Difference
Total Market Capitalisation is the number most financial websites report prominently. It's simply:
Total Market Cap = Current Share Price × Total Shares Issued
Simple, clean, and for index construction almost completely useless.
Here's why. A company's total shares include shares held by its founders, the government, corporate sponsors, foreign parent companies, and strategic investors who have no intention of selling on the open market. These shares are locked up. They don't trade on the PSX. If you're building a portfolio that needs to actually buy a proportional slice of this company, you cannot touch those locked shares at any price.
Free Float Market Capitalisation is more surgical. It counts only the shares that are:
- Genuinely available for trading on the PSX by the public
- Not locked up by government ownership, promoter stakes, or strategic holdings that haven't been offered publicly
Free Float Market Cap = Current Share Price × (Total Shares − Locked/Restricted Shares)
The difference between these two numbers can be enormous and it determines almost everything about how your ETF is constructed.
What Counts as "Locked" Shares on the PSX?
Before we go further, it's worth understanding exactly which categories of shareholding the PSX and global index providers exclude from free float calculations.
Typically excluded from free float:
- Government and state entity holdings - the single largest excluded category on the PSX
- Promoter and founder stakes - shares held by the original owners or controlling families
- Strategic foreign investor stakes - a foreign parent company holding 51%+ of a local listed subsidiary
- Cross-holdings - one group company holding shares in another within the same conglomerate
- Locked-in IPO shares - shares that come with lock-in periods post-listing
- Employee stock option plans (ESOPs) - unvested employee shares
Included in free float:
- Shares held by mutual funds, ETFs, and institutional investors who trade regularly
- Foreign portfolio investors (FPI) holdings below strategic thresholds
- Retail investor holdings on the PSX
The distinction is about intent. Shares held by an owner who is not in the business of trading them are structural, not investable. Free float captures only what's genuinely in the market.
Why This Matters: The OGDC Example
Let's apply this directly to the PSX.
OGDC is majority-owned by the Pakistani government, which holds roughly 74% of the company's total shares. These shares do not trade on the PSX. The government is not selling them. They simply sit there, representing state ownership of a strategic oil and gas asset.
Now imagine if the KSE-100 and ETFs tracking it weighted OGDC by its total market cap. The index would demand that ETF managers hold a massive position in OGDC proportional to its full size. But since 74% of the shares never actually trade, this would create an impossible supply problem: ETF managers and institutional investors competing for the 26% that's actually available, driving OGDC's price far beyond its fundamental value - simply because the index mathematically required it to be held.
By using free float, the index says: "We only count the 26% that's accessible to investors." OGDC's index weight drops significantly. The ETF composition becomes investable and realistic, not a distortion machine.
The PSX Free Float Landscape: What This Looks Like in Practice
This dynamic plays out across many of Pakistan's most prominent listed companies. State-owned enterprises (SOEs) listed on the PSX - OGDC, PPL, SNGPL, SSGPL, NBP, PTC - typically have substantial government stakes that significantly compress their free float and therefore their index weight.
The result is that when you buy a PSX broad-market ETF, you often end up holding less of the large state-owned energy sector than intuition would suggest, and more of the private banking, cement, and technology sectors, where free floats are typically much higher.
| Company Type | Typical Free Float % | Index Weight Impact |
|---|---|---|
| State-owned enterprises (SOEs) | 15–30% | Heavily compressed weight despite large headline size |
| Privatised or mixed-ownership banks | 40–70% | Moderate to high index weight |
| Privately owned industrials and conglomerates | 50–85% | Weight closely tracks absolute company size |
| Technology and small-cap growth companies | 60–90%+ | High free float, but absolute size may limit index weight |
Why Free Float Weighting Actually Protects You as an Investor
Beyond making index construction theoretically coherent, free float weighting provides concrete, practical benefits to ETF investors that are easy to overlook.
1. Liquidity Alignment
Because only genuinely tradeable shares are counted, the ETF's target weights are achievable in the real market. If an ETF needs to hold 4% of its portfolio in a specific stock, that 4% can be sourced from the market without causing a price spike - because the free float is deep enough to accommodate it.
Without free float weighting, an ETF manager trying to build a position proportional to total market cap in a heavily restricted stock would be buying in a market with a fraction of the required supply. The buying pressure alone would distort the price.
2. Rebalancing Efficiency
Every six months, the KSE-100 rebalances. Companies enter and exit, weights shift. Every ETF tracking the index must trade accordingly.
If index weights were based on total market cap, these rebalancing trades would be concentrated in stocks with thin actual float - moving prices sharply against the ETF on every rebalance. Free float weighting ensures the rebalancing trades happen in liquid stocks, keeping transaction costs and slippage manageable.
3. Resistance to Artificial Manipulation
A company that wants to inflate its index weight cannot do so simply by issuing new shares internally or orchestrating cross-holdings between group entities. Those shares won't count toward free float. The only way to increase index weight legitimately is to genuinely reduce promoter holdings by selling to the public - which benefits all shareholders.
A Worked Rebalancing Scenario
Let's say a major state-owned enterprise sells a 10% stake to the public through a secondary market offering (privatisation). Suddenly, that company's free float jumps from 20% to 30%.
At the next KSE-100 rebalancing:
- The company's free float market cap increases by 50%
- Its index weight increases proportionally
- ETFs tracking the index must increase their holdings in that stock
- Demand for the stock rises as ETF managers rebalance - this is part of why privatisation announcements often trigger rallies in the target company's stock
Understanding this mechanism lets you anticipate ETF-driven demand around major corporate events. It's not just theoretical - it plays out in live trading every rebalancing cycle.
What This Means When You Read an ETF Factsheet
The next time you open a PSX ETF's factsheet and scan the top holdings:
- The company at the top is not necessarily the "biggest company in Pakistan." It's the company with the largest free float market cap relative to the index - which can be very different from headline total market cap.
- If a company looks underweighted relative to its headline market cap, check for a large promoter or government stake. You'll usually find one.
- Watch for free float events. Government divestments, promoter stake reductions, IPO lock-up expiries - any of these can shift index weights at the next rebalancing, and with them, ETF compositions and demand patterns.
Frequently Asked Questions
Does free float change over time? Yes, and significantly. When a government sells part of a state-owned company to the public, the free float of that company increases. When a founder buys back shares off the market, free float decreases. These changes are captured in the biannual KSE-100 rebalancing.
Does every index use the same free float definition? No, which is one reason the same company can have different weights in different indices. MSCI, FTSE Russell, and the PSX each use slightly different methodologies for classifying what counts as freely available shares. For PSX-listed ETFs, the PSX's own free float definition governs index construction.
Should I care about free float when picking individual stocks? Absolutely. A stock with a thin free float, even if it's a large company, will typically have wider bid-ask spreads, less institutional coverage, and more price volatility when large investors try to build or exit positions. It's a liquidity risk that doesn't show up in any headline number.
The Bottom Line
Free float market cap is not a technicality reserved for index methodologists. It is the foundational reason why ETFs are investable rather than theoretical. Every time you see a holding percentage in an ETF factsheet, there is a free float calculation underneath it determining exactly why that stock commands that much of your money.
Understanding this lets you look past the headline market cap rankings you see on financial websites - those numbers are for bragging rights. What actually drives your ETF's performance is the free float, and now you know exactly why.
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This article is for educational and informational purposes only. It does not constitute investment advice. Always conduct your own due diligence and consult a qualified financial advisor before making any investment decisions. All data sourced from PSX, MUFAP, and fund factsheets. Past performance is not indicative of future results.
Dr. Faisal Shahzad
Chief Investment Strategist
Dr. Faisal Shahzad holds an MBA from Innsbruck, Austria, and has spent over a decade navigating complex financial markets. He specializes in Exchange Traded Funds (ETFs) and brings extensive, practical knowledge of both international markets and the Pakistan Stock Exchange (PSX).
Expertise: 15+ Years of experience in ETFs, both internationally and on the PSX.