Large cap stocks are just one type of stock to add to your portfolio. They are the stocks of vary large companies and are often considered safer investments. Like other investments, though, they have both advantages and drawbacks. If you’re not familiar with the ins and outs of large cap stocks, keep reading to learn what they are, how they work and how they compare to other types of securities.
What Is a Large Cap Stock?
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-$10 billion. Small cap stocks have a market cap between $300 million and $2 billion.
Large cap stocks – sometimes called big cap stocks – can more easily be equated with larger 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.
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.
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.
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.
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.
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 of Investing In Large Cap Stocks
The features that define large cap companies are what help make them attractive to investors. Generally, these stocks are viewed as being 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. This is because their reputation is usually known across a broad base of investors.
Cons to Consider
Like any other investment, there are some potential downsides to be aware of when investing in larger company stocks.
First, these types of stocks generally aren’t suited to the investor who’s 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 caps 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 large cap stocks 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.
The Bottom Line
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.
Tips for Investing
- There are a few key metrics you can look at to evaluate larger companies before investing. 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. Looking at how share prices and dividend prices are trending can also offer some valuable insight. Just remember that past history doesn’t guarantee future performance.
- A financial advisor can also help you build and manage a portfolio that includes large cap stocks. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/grandriver, ©iStock.com/vgajic, ©iStock.com/Sitthiphong