- Large-cap stocks (“large caps”) are companies that have a market capitalisation value of over $US10 billion.
- Large caps are usually mature, well-established companies that have demonstrated their ability to be consistently successful and pay regular dividends.
- Though they lack great growth potential, large caps are a favourite of conservative investors for their steady payouts and prices.
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In August 2020 Apple (AAPL) became the first US exchange-listed company to reach a market capitalisation of $US2 trillion. That record comes just two years after it became the first company to break the $US1 trillion mark.
Not bad for an outfit that started in a garage in California.
Apple is the poster child for the “large-cap” (short for “large-capitalisation”) category of stocks â€” enormous companies that investors value highly. On the more conservative side of the investment landscape, they’re famed for providing stable returns with relatively low risk.
So how can you get in on the action? From market cap valuation to risk assessment, here’s what you need to know about large-cap stocks.
What is market capitalisation?
But first, a quick primer. Market capitalisation (“market cap” for short) is the total value of all a company’s stock. It’s calculated by multiplying all of the firm’s outstanding shares â€” the ones trading on the stock market â€” by the current price of each share.
In effect, it’s the cost of purchasing all of a company’s stock at a given moment. Market cap indicates the size of a company and what it’s worth, in the eyes of the market.
Investors and analysts like to group companies with similar market capitalisation into size categories: large caps, mid-caps, and small-caps. Grouping companies together by market capitalisation allows you to analyse the performance of businesses of similar value â€” to compare Apple to apples, so to speak â€” and compare their performance, which can be key when it comes to picking stocks.
What are large-cap stocks?
As their name implies, large-cap stocks are the largest companies that are valued the highest by investors. Also known as “big caps,” the category specifically refers to publicly traded firms whose market capitalisation is over $US10 billion.
Large-cap stocks can be from any field. Generally, they are the long-established companies that are dominant in their industries and often household names.
Besides Apple, this group includes companies like
- Johnson & Johnson
- Alphabet (parent to Google)
Characteristics of large-cap companies
The companies that make it to the large-cap category tend to have several characteristics in common.
- They’re transparent. Financial information about these companies is publicly available, as are reams of expert analysis and forecasting. It’s easy to find the information you need to make well-informed investment decisions about these companies.
- They pay dividends. Because they are so well-established in the market, these companies can commit to relatively high dividends. That means investors can expect consistent income from their company shares â€” payouts for immediate income or to reinvest back into the company.
- They’re stable. These are typically companies that have been around a while â€” decades, even a century â€” and have weathered some challenging economic conditions. Their operations, earnings, and share prices remain steady, no matter what the stock market overall is doing.
Large caps usually perform steadily
All these characteristics make large caps fairly safe investments.
They typically have solid performance and provide reliable returns. Robert R. Johnson, professor of finance at Creighton University, notes that large caps as a group returned 13.6% annually between 2010 and 2019.
Their shares also feature relatively low volatility. Between 1926 and 2019, Johnson says that the volatility of large-cap returns, measured by a standard deviation of annual returns, was 19.8%. That’s quite a bit lower than, for example, small-caps, which had a standard deviation of 31.5% over the same period.
Together, stable returns and lower volatility translate into one thing for investors: lower risk.
But large caps have limited growth potential
The downside is that large caps may not post the massive capital gains that stocks in other market cap segments often see.
That’s largely because of their size â€” and age. Large companies that have matured typically have less appreciation potential than smaller companies. (Hence, the steady dividends large caps often offer; younger firms tend to put any profits back into operations, or research and development â€” not on shareholder payouts.)
Not that large-cap stock prices can’t or don’t rise â€” it’s just that the adolescent growth spurt days are over.
So while large caps are lower-risk than small-caps, they also typically post lower returns. Their stock will basically hold its value, but won’t post skyrocketing returns.
And large caps aren’t totally without risk
No investment is completely without risk, especially equities. Just because a company is a large-cap â€” huge, venerable, blessed with a sound history and balance sheet â€” doesn’t mean it is necessarily a safe bet.
“All investors should remember the cautionary tale of the once-giant energy company, Enron,” says Johnson.
“At its peak in the late 2000s, Enron had a market cap of $US60 billion and the stock was priced at over $US90 per share. A year later the stock was priced at $US0.25 and the name Enron was synonymous with financial scandal.”
Large caps vs. blue chips
Large-cap stocks overlap with â€” but are not exactly the same as â€” another category of stocks, the blue chips.
Large-cap stock strictly refers to the numbers â€” that market capitalisation dollar value the company has. By contrast,blue-chip stocks belong to a more loosely defined group: There’s no official or statistical definition.
But generally, they come from mature companies that have demonstrated solid performance over a long period of time â€” sometimes over 100 years. They are considered very low-risk and reliable. They often pay good dividends.
So blue-chip companies usually also fall into the large caps category. But not all large caps are blue-chips.
For example, Tesla’s (TSLA) market cap has recently rocketed up to $US567 billion. By the numbers alone, it’s well into the large-cap group. But being a relatively new company without a long history of strong financials, it probably does not yet qualify as a blue-chip stock.
The financial takeaway
Large-cap stocks represent are the biggest, most valuable publicly traded companies with over $US10 billion in market capitalisation.
They are especially favoured by more conservative investors because they tend to provide steady â€” if not huge â€” returns and be relatively low risk. But large caps could arguably have a place in any well-diversified portfolio, their solidity and stability providing a counterbalance to smaller, promising-but-volatile small-cap stocks among your holdings.
Related Coverage in Investing:
Value investing is a bargain-hunting strategy that targets low-performing but quality stocks, aiming to profit when their prices rise again
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