Definition

Large-Cap Stocks

  • Updated on

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.

 

Summary
  • Large-cap stocks are shares of the company with large market capitalisations.
  • Apple, Microsoft, Amazon are some examples of large cap stocks.

Frequently Asked Questions

What is market capitalisation?

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.

Which are some well-known large-cap stocks?

Some of the world's largest companies in terms of market capitalisation are-

  • Apple
  • Microsoft
  • Saudi Arabian Oil Company
  • Amazon
  • Alphabet
  • Facebook
  • Tencent Holdings
  • Tesla
  • Alibaba Group
  • Berkshire Hathway
  • Taiwan Semiconductor
  • Samsung Electronics
  • Visa
  • JP Morgan Chase
  • Johnson & Johnson

Image source © Waingro | Megapixl.com

What are the key features of large-cap stocks?

Some key features are common to all large-cap stocks across the world:-

  • Businesses with large-cap stocks are stable and are considered resilient in troubled times. Adding large-cap stocks to an investor's portfolio can protect investors from the downswings in the economic cycle.
  • The market price of large-cap stocks is very high
  • Large-cap companies can provide stable dividends- being in good financial standing makes such companies pay regular dividends.
  • Large-cap stocks have sufficient funds available at their disposal for the purchase of capital assets, research and development and further growth and expansion.
  • Since these companies already are large, their growth rate is relatively slower than those of new ones.
  • Assessing large-cap companies becomes easier because there is enough data on their performance since the business started. Large-cap stocks are possible in the long run only in cases of managed well and those that are appreciated in the public eye. The public evaluates a company not just based on their financials but also on factors like the quality of their product, their initiatives towards corporate social responsibility, their employee dealings etc.
  • Large-cap stocks have solid financials and hence are not overly impacted by market volatility and hence are a good choice for investors eyeing dividends as a regular source of income. The features of slow growth rate and regular dividends make large-cap stocks suitable for long term investing.

Image source © Sunplus60 | Megapixl.com

What is the difference between large-cap, mid-cap and small-cap stocks?

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.