Finance

Large-Cap Stocks

Large-Cap Stocks

Large capital stocks are also known as big caps. Large-cap stocks are basically shares that trade for corporations that have a market capitalization of $10 million or more. Large-cap is a shortened version of “large market capitalization”.

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How it is calculated?

The formula for market capitalization is as under:

Market capitalization = Number of shares outstanding * Stock price per share  

A company’s stock is generally categorized into three. They are large-cap, mid-cap, or small-cap. Large-cap stocks represent 93% of the total U.S equities market and hence are often looked to as core portfolio investments.

Features of large-cap stock:

The features of large-cap stock are as follows.

  • Transparent – large-cap companies are generally transparent so that it is very easy for the investors to find out and analyze public information about them and then make a decision.
  • Dividend payers – As large-cap companies commit to high dividend payout ratios they are the companies who are often selected by investors for dividend income distributions.
  • Stable and impactful – These large companies are blue-chip companies that generate stable revenue and earnings. Large-cap companies are market leaders and tend to move with the market economy because of their size. They produce innovative solutions often with global market operations. The market news about these companies is very impactful to the board.
  • Quality of management and business – managing large companies needs great experience and spirit to lead constant growth. Quality of management and business are essential parameters before choosing a stock in which one needs to invest.

Example:

If a company XYZ’s share price is $50 and it has 1 million outstanding shares. The market capitalization of the company would hence be

Market capitalization= Number of shares outstanding * Stock price per share

= 1 million * $50

Market capitalization = $50 million                                      

Large-cap stocks are shares of a company with a market cap of more than $10 billion. These are very well-known and well-established companies and some are worth more than the economic output of many small countries.

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Advantages and risk associated with large-cap stock

Advantages:

  • Large-cap stocks are valued at greater than $10 billion in the market and hence they are more stable and mature investments.
  • They typically have lower volatility and a steady dividend stream.
  • The stocks of large-cap companies are strong and trustworthy with minimum investment risk.
  • They are just perfect for investing a lumpsum amount.
  • These companies can withstand firmly even during market turbulence.
  • Large-cap funds are highly liquid and therefore have an advantage over mid-cap funds.

Disadvantages:

  • There is low growth as well as low return on investment as compared to small and mid-cap funds.
  • There is no additional income in large-cap funds in the growing market. The income or the returns generated are stable.
  • Large-cap funds are suitable only for the long term. They are not a good option for short-term investments.
  • Investors will not have a right over how and when the investment is made since all of the decisions are taken by the fund managers.

Final thoughts:

Large companies are well established which means they have a more consistent income and hence the greatest benefit is the stability that they can provide. They are also less volatile than mid or small-cap funds. They have low risk as the investments are made in large companies. In the long term, large-cap funds have better returns than mid-cap funds. Large-cap funds are not suitable for short-term investments. When the market is down the investors invest in large-cap funds as they are the safest investments. Since large-cap companies have a long-run business, the details about such companies are readily available. This becomes easy for the shareholders and investors to decide whether the company is worth the investment.

AuthorSaachi Lodha

About the Author – A passionate professional with knowledge of Accounting and Finance and currently exploring Financial Risk Management (FRM) to gain knowledge and exposure. As a part of the FRM course also writing blogs to explore the field more and deep dive into the content.

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