What is a large-cap stock?
A large-cap stock is any company with a market capitalization of $10 billion or more. Market capitalization is the current market value of a company’s outstanding shares multiplied by the number of shares outstanding. It is a useful way to compare companies with different numbers of shares outstanding. A large-cap stock is generally any company with a market cap of $10 billion or larger. Most large-cap stocks are household names like Apple, Amazon, Facebook, ExxonMobil, Berkshire Hathaway, and Johnson & Johnson. Small-cap stocks are those with a market cap of less than $2 billion. Large-cap stocks tend to be more established companies that have a long track record of successful operations. They typically have more stable earnings and generate less volatility than small-cap stocks. As such, large-cap stocks are generally considered a more conservative investment than small-cap stocks. Large-cap stocks can provide investors with a more diversified portfolio and are generally easier to research and trade than small-cap stocks.
Benefits of investing in large-cap stocks
- They have a lower risk of failure than small-cap stocks. While there is no such thing as a risk-free investment, large-cap stocks are more established than small-cap stocks and have a lower risk of bankruptcy or complete failure of the company.
- They have higher liquidity than small-cap stocks. Liquidity refers to how easily an asset can be traded for cash or another asset. Most large-cap stocks are more liquid than small-cap stocks, meaning they are easier to buy and sell without affecting the price as much. - They have better analyst coverage than small-cap stocks. This can help you make better investment decisions by having more research available on large-cap stocks.
- They can diversify your portfolio and spread risk. Large-cap stocks are a larger and more established part of the market. By including them in your portfolio, you can help spread out risk and lower volatility while still earning a reasonable return. - They have lower taxes than small-cap stocks. Large-cap stocks generally have lower short-term capital gains tax rates than small-cap stocks. This can give you more flexibility in managing your taxes throughout the year.
- They have lower transaction costs than small-cap stocks. This can help lower the overall cost of investing in a portfolio of large-cap stocks. - They have better liquidity than commodities and real estate. Large-cap stocks can provide a more stable source of return than commodities or real estate investments.
Risks of investing in large-cap stocks
- They are more expensive. The lower risk of investing in large-cap stocks comes at a higher price. This means you need to earn a higher return on an annual basis to get a decent return on your investment.
- They have lower expected growth. The lower risk of investing in large-cap stocks means they also have lower expected growth. This is something to keep in mind when deciding how to allocate your portfolio.
- They have lower expected dividend yields. Because larger companies generally pay out a smaller portion of their profits in dividends, a portfolio of large-cap stocks will likely have a lower expected dividend yield than a portfolio of small-cap stocks. This can affect how quickly your portfolio grows over time.
- They may be harder to find an edge. Because there are more large-cap stocks to research and trade than small-cap stocks, it may be harder to find an edge over the market. This can make it more challenging to justify your investment decisions and make sure your portfolio is properly diversified.
- They are more volatile. Large-cap stocks are more volatile than small-cap stocks, meaning they can experience larger swings in the short-term price of their shares. This can make it more challenging to get a portfolio to fit your risk tolerance.
Analyzing large-cap stocks
If you are new to investing in large-cap stocks, it can be helpful to start by analyzing a few companies. Start with a stock you know well, such as a company you use frequently or work for. Find out the name of the investor relations department and contact them to set up a phone call or meeting with their analysts. Make sure to take notes during the meeting and ask lots of questions. This can be a great way to get your feet wet in analyzing stocks without a lot of upfront costs. You can also consider researching stocks through online stock research tools, investment newsletters, and financial analysis websites. You can also learn from books and articles written by investors and financial experts. It can be a good idea to diversify your portfolio by investing in stocks from a wide range of industries. Focus on stocks with strong fundamentals, such as a solid balance sheet, good return on equity, strong earnings growth, and low debt-to-equity ratios.