What are large-cap stocks?
In the term large-cap stocks, the term cap stands for market capitalisation. Market capitalisation is a means of evaluating the value of a business. It is the market value of the outstanding shares of the company. Large-cap stocks, therefore, are shares of the company with large market capitalisations. All large-cap stocks are listed on stock exchanges and are listed at the top. Some large-cap stocks are also referred to as blue-chip stocks. Blue-chip stocks are shares of companies that are the market leaders of their respective segments are usually household names.
Market capitalisation is the total number of outstanding shares of the company multiplied by the share's current price. For example, if a company XYZ has 50000 outstanding shares and the price of each share is US$100. Market capitalisation= Number of outstanding shares*price per share. Thus, the market capitalisation of XYZ company is US$5000000. Based on market capitalisation, companies can be classified as large-cap, mid-cap and small-cap.
Some of the world's largest companies in terms of market capitalisation are-
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Some key features are common to all large-cap stocks across the world:-
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Company type and stature: Large-cap stocks are typically issued by well-established, well-known corporations with a proven track record of success. Large-cap companies, sometimes known as "blue chips," are regarded for generating high-quality goods and services, as well as a track record of regular dividend payments and stable growth. Large-cap corporations are frequently dominating players in well-established industries, and their brand names may be well-known across the country. Large-cap firms are those that are large and well-known in the stock market. These businesses have dependable management and are among the country's top corporations. Mid-cap corporations are in the middle of the market, between large and small-cap companies. These businesses are small and are in the top 100–250 in the country. Finally, small-cap companies are substantially smaller than large-cap corporations and have a greater possibility for rapid growth.
Market capitalisation: Companies with a market capitalisation of US$10bn or more are considered large-cap. Mid-cap firms, on the other hand, have a market capitalisation between US$2bn and US$10bn. The market capitalisation of small-cap enterprises is less than US$2bn.
Volatility: One of the significant risks involved with an investment in the stock market is volatility, which refers to the stability of prices. On one end of the extreme, there are stocks whose prices remain stable even in highly volatile markets. These stocks are known as low volatile stocks. On the other hand, there are certain other stocks whose prices move widely even at the shortest instance of instability in the market. These are high volatility stocks. Large-cap stocks tend to have high liquidity resulting in lower volatility. In other words, prices do not fluctuate widely in a volatile market. As a result, investments in such stocks are considered low risk.
On the other hand, mid-cap stocks tend to have relatively lower volumes traded, resulting in slightly higher volatility. As a result, these stocks tend to have a higher risk compared to large-cap stocks. Finally, on the other end of the spectrum are small-cap stocks, which tend to have high volatility resulting in wide swings in prices and are considered risky investments.
Growth potential: A corollary of risk is return—higher the risk, higher the return and vice versa. Large-cap stocks are investments in stable and mature businesses, have higher volumes and lower volatility; as a result, the growth potential and the returns in such investments are limited compared to mid-cap and small-cap stocks. On the other hand, small-cap stocks are investments in relatively younger businesses with higher potential for growth; as a result, the return on such stocks tend to be higher. Finally, mid-cap stocks fall somewhere in the middle of the spectrum with growth potential higher than large-cap but lower than small-cap stocks. However, as suggested above, the return is accompanied by risk, and hence, investment decisions should be taken by considering both the factors.
Liquidity: Liquidity refers to the ability of an investor to buy or sell a stock without impacting the prices. Investors in small-cap stocks find it challenging to buy or sell stocks without impacting the prices. Given the large base of investors in large-cap stocks, such stocks have higher liquidity. On the other hand, given fewer investors in small-cap stocks, these stocks tend to have lower liquidity. Mid-cap stocks fall somewhere in the middle of the spectrum.