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What Are Large-Cap Stocks?

What are large-cap stocks? Large cap stocks are stocks of businesses with a market capitalization of over $10 billion and are typically found in the market’s leading benchmark indexes on a global scale.

These indexes include the S&P 500, Dow Jones, and the Nasdaq. Large cap stocks are well-known, well-established enterprises that usually operate at a global or multinational scale. 

How Do Large-Cap Stocks Work?

One of the key reasons some investors favor large-cap stocks is their large size which makes them less sensitive to changes in the overall market and economy. Large cap stocks are generally thought to be more stable in comparison to small cap stocks, and overall less risky.

During an economic downturn, investors will often choose to invest in these stocks because they are companies better suited for performing well even during poor economic conditions. The companies’ large size allows for greater stability within the firm and lower volatility in the market price of shares.

Many of these businesses that hold large cap stocks, extend their activities globally and will invest in a variety of different industries. When these companies start expanding overseas, they’ll search for ways to purchase smaller businesses or even merge with competitors, further increasing their capitalization.

What Is the Market Capitalization of Large-Cap Stocks?

The market capitalization of a business refers to its market value. Market capitalization is a method of dividing stock securities, commonly used in the financial industry.

The market capitalization of a stock is a vital factor financial firms will closely observe before making any investment decisions. 

What Are Large-Cap Stocks Used for?

The stock market is classified into three categories: large, mid, and small-cap stocks. Since large cap firms are usually more stable and mature, they’re typically less risky investments than mid- to small-cap companies.

Oftentimes, portfolio managers will utilize large cap stocks to help leverage and diversify their clients portfolios against riskier investments. These risk averse stocks are a great tool for diversifying your portfolio and the dividend payouts are an added bonus.

While these stocks do not provide the same high-return opportunities as small and mid cap stocks, large-cap stocks are less expensive and less susceptible to price fluctuations. More often than not, these are good investments to make if you are willing to wait and steadily build profits.

How to Find Large-Cap Stocks

Traders are able to profit from the continuing success of industry leaders by investing in large cap stocks. To find these stocks, you can calculate the market capitalization of a company by multiplying its share price by the amount of outstanding shares.

The S&P 500 Index is a good reference as it exclusively consists of large cap stocks. Generally on a list of large cap stocks, you will see all of the corporate household names we hear everyday. For example, Tesla, Google, Apple, Facebook, Nike, etc.

However, there are some not as well known names in the bunch that can be hidden investment gems. Always do your own thorough research before making any investment decisions and if needed reach out to a financial advisor.

Features of Large-Cap Stocks

Large-cap stocks have many different features that differentiate them from other types of stocks that investors can choose from.

Safe Investments

Large-cap stocks are usually much safer investments than mid and small cap stocks. Larger corporations typically have an advantage over smaller firms during an economic shock or when there is uncertainty in the stock market.

Stocks with a larger market capitalization will also often shine when the economy is expanding. Traders are more likely to put their money into bigger, more well-known businesses.

Large-cap companies can provide stable profits given they can sustain dividend payouts to their stock investors.

Transparent

Large cap corporations typically have information about the company available to the general public. Access to financial statements and financial reports of a company is vital if you want to get a sense of how correct a company’s valuations are.

Having access to this data allows for a full fundamental analysis to be run, helping investors better decipher what their investment strategy should be for that given security.

Easy to Evaluate

It may be more difficult to identify patterns and forecast stock prices for newer businesses that are fresh on the market. Investors are often hesitant with new companies because they are afraid of acquiring an overvalued stock that will suddenly drop in price.

Fortunately, large cap stocks have often been on the market for years and will have plenty of historical context about the firm available for investors.

Large-Cap Stocks vs Small-Cap Stocks

Both large-cap and small-cap stocks have different features and advantages that investors should be aware of when analyzing the stock market.

Large-Cap Stocks Generate Smaller Returns

Small-cap stocks have a higher return potential than large-cap stocks, but they still have a higher risk profile. Stocks with small market cap have historically outperformed large-cap stocks, though at a higher risk.

Although the high returns are a good trade off for taking a risk, you should also consider the trade off between that high risk and smaller but steady returns. While large cap stocks may not have the potential to make you rich quickly, they are worth keeping in your portfolio to generate a steady, passive, profit, you can rely on.

Less Risk With Large-Cap Stocks

Large cap stocks are the safest investment of small, medium, and large cap stocks and therefore are the most low risk. Small-cap stocks can be much more risky because they are often newer players in the game and can sometimes have inefficient business models and leaders that aren’t sure how to navigate the business environment.

Whereas, large cap stocks are often more established and will be run by people with years of experience as the stakes are much higher. Large cap stocks will also most often pay dividends which firms will prioritize when making decisions to help protect their investors.

Small-Cap Stocks Are Less Reliable

Small-cap stocks are less reliable because they are highly volatile and are less equipped than large-cap firms to deal with declining demand in the global economy. This can be tough for investors during an economic downturn because these stocks often will plummet.

Small-cap stocks offer more flexibility to take risks and capitalize on developments on the stock market however during a time of economic instability, large cap stocks offer more stability.

How to Invest in Large-Cap Stocks

Large cap stocks can be acquired through an exchange traded fund that follows a large-cap index, or through large-cap mutual funds which are openly available. Many investors will use the Russell 1000 Index to find and compare large-cap companies to invest in.

Financial Advisors Can Help You Invest in Stocks

Large cap stocks are stocks of those businesses with a market capitalization of more than $10 billion. When the economy is down investors will often choose to invest in these stocks because they are more capable of performing well even during poor economic conditions.

If you are unsure if this is the right investment option for you, consider reaching out to a professional. Financial advisors can help you invest in stocks to properly diversify your portfolio and leverage against risk.