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Large-Cap Stocks: Definition and Pros & Cons

Large-cap, or large capitalization, stocks are a type of stock that belongs to very large, established companies like Apple and Microsoft. As a result of this, these stocks are often considered the safest of all equity investments. But like all other types of securities, large-cap stocks have both advantages and drawbacks. Investing in large-cap stocks is as easy as opening a brokerage account and transferring money in. If you’d prefer to have some help investing in large-cap stocks, consider working with a financial advisor.

What Are Large-Cap Stocks?

Stocks can be classified according to their market capitalization, or the total dollar value of a company’s outstanding shares on the stock market. A stock that’s referred to as large-cap is a stock that’s issued by a company with a market capitalization of $10 billion or more. A mid-cap stock, by comparison, has a market cap ranging from $2 billion to $10 billion. Small-cap stocks have a market cap between $300 million and $2 billion.

Large-cap stocks are basically equal to large companies. A few well-known companies that are large-cap stocks include Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB). While there may be more small-cap companies, large-cap companies have a higher total value. The various U.S. stock indexes measure and track both large and small-cap stocks based on performance, stock price, company size and more.

Common Characteristics of Large-Cap Stocks

Aside from market capitalization, companies that carry the “large-cap” label tend to have other things in common as well. Here’s an overview of the characteristics that many large-cap stocks share:

Dividend Payouts

A dividend is a payment made to an investor out of the company’s profits. Dividends can be paid monthly, quarterly, biannually or yearly. Many large-cap companies pay dividends to their investors, in addition to the returns enjoyed through price appreciation. Pfizer (PFE), Coca-Cola (KO) and IBM (IBM) are just a few of the large-cap leaders that pay dividends.

Overall Stability

Another key feature of companies with a larger market capitalization is stability. These are companies that have strong fundamentals and have established themselves as market leaders. Essentially, these are the blue-chip stocks. These are companies that are financially sound and have a track record of consistent growth and profitability.

Reputable Management

Large-cap companies, because of their sheer size, by nature need to be well-organized. Their management teams and leadership boards often have years of combined experience. Looking at the quality of the management team is one way to gauge the strength and growth outlook of a large-cap firm.

Easily Evaluated

Another feature of larger companies is that they often have a wealth of information readily available for investors to review and analyze. Earnings reports, for example, offer a degree of transparency that can be helpful when making buy and sell decisions for a particular stock.

Pros and Cons of Investing in Large-Cap Stocks

Large-Cap Stocks: Definition and Pros & Cons

The features that define large-cap companies are what help make them attractive to investors. Generally, these stocks are safer investments compared to mid-cap or small-cap stocks. During periods of volatility in the stock market, a large-cap company may have an edge over smaller companies when it comes to riding out pricing fluctuations or larger shifts in the economy.

These stocks can also outperform when the economy is expanding. This is because investors may be more willing to invest in larger, more recognizable companies. Regardless of what’s happening with the economy, large-cap companies can offer reliable income if they’re able to maintain dividend payouts to investors through various cycles.

Because they do tend to offer more transparency than mid or small-cap companies, a large-cap stock can be easier for investors to evaluate. That’s important if you want to get a sense of how accurate valuations are for a particular company.

With newer companies that have a shorter history, for example, it can be harder to pinpoint accurate values. The danger here lies in buying an overvalued stock that experiences a significant price drop later. Large-cap stocks can also be easier to sell if you need to change your position.

Like any other investment, there are some potential downsides to be aware of when investing in larger company stocks. For example, these types of stocks generally aren’t great for investors who are looking for a quick buy-and-sell win. They’re better suited for a buy and hold strategy. This involves buying shares and holding them over time with hopes that their value increases.

This relates to another con, which involves the return profile of large-cap stocks. Generally, the more risk associated with a stock, the higher the return may be. Since large-cap stocks are seen as safer bets, you may not see sky-high returns the way you might with stocks of a different market cap. Investing in them is generally more appropriate if you’re looking for stable returns and reliable income from dividends.

Something else that can work against larger companies is their size. Reorganizing internally or revamping their business model to pivot in another direction could be hard to do. This could put them at a disadvantage in the marketplace if it causes them to lose some of their competitive edge.

Large-Cap Stocks vs. Small-Cap Stocks

Large-cap stocks and small-cap stocks are the two ends of the spectrum when it comes to stock market company capitalizations. And while they’re similar in form and function, their characteristics differ quite a bit.

First and foremost, small-cap companies are those that are typically in the earlier stages of their existence. Although small-cap companies often climb the ranks to mid-cap or even large-cap, they’re inherently riskier than larger companies. That’s because large-cap companies have years of financial success under their belts, making their stocks much more reliable in the process.

Because the value of small-cap stocks has more room to grow than that of large-cap stocks, their percentage returns have the potential to be much higher. Their share prices are obviously also lower, as they’re simply not worth as much as larger companies. Despite higher share prices, though, large-cap stocks are generally safer.

Bottom Line

Large-Cap Stocks: Definition and Pros & Cons

There are plenty of things to like about large-cap investments and a few downsides to keep in mind as well. They can help you diversify your portfolio to help manage risk. And if you choose a dividend paying stock, they could help you generate income, too.

Large-cap stocks can play an important part in your overall investment strategy. However, it’s really important that you diversify your portfolio so your returns aren’t overly reliant on a specific area of the market.

Tips for Investing in Large-Cap Stocks

  • A financial advisor can help you build and maintain a portfolio that includes large-cap stocks. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. Get started now.
  • There are a few key metrics you can look at when evaluating larger companies’ stocks. For example, it helps to consider things like the price-earnings ratio. This measures the company’s current share price in relation to its earnings per share, and how much debt the company has on its balance sheet. Paying attention to how share prices and dividend prices are trending can also offer some valuable insight. Just remember that past history doesn’t guarantee future performance.

Photo credit: ©iStock.com/grandriver, ©iStock.com/vgajic, ©iStock.com/Sitthiphong

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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