What are Large Cap Stocks?
Summary
In large cap stocks, the term ‘cap’ is an abbreviated form of capitalization, which measures a company’s value by multiplying the total number of shares by the price of each unit. Hence, large cap stocks are shares issued by a company with a large market capitalisation.
There are three primary types of capped companies based on this valuation. These include large-cap, mid-cap, and small-cap. Companies with a market capitalization below Rs 5,000 Crore are small-cap companies, whereas those with a market capitalization between Rs 5,000 and 20,000 are known to be mid-cap companies. As for large-cap companies, they have a market capitalization of Rs 20,000 Crore or more.
Large-cap companies top the list of recognised stock exchange indices around the world. For example, India’s Nifty hosts the top fifty large cap stocks, the most traded in the stock market.
What are large cap stocks?
Large-cap stocks refer to shares of companies that have a large market capitalization. Market capitalization or market cap describes a company’s size and value in the stock market. It is calculated by multiplying the company’s share price by the number of outstanding shares.
Although there is no universally agreed-upon definition, large cap stocks are generally associated with companies having a market capitalization above a certain threshold, often in the billions of dollars. These companies have a strong footmark in their respective industries and have a long history of success to their credit.
Investing in large-cap stocks is generally considered safer than investing in stocks of companies with a smaller market size. Large cap stocks are more stable and less volatile. That is because they have already achieved a certain level of success. They are less prone to getting affected by temporary market downturn. They may also pay dividends to shareholders, providing additional income.
Large-cap stocks are frequently included in major stock market indices. These stocks are actively traded and often gain attention from investors, analysts, and institutional buyers.
Why should you invest in large cap stocks?
Investing in large cap stocks can offer you several benefits:
- Stability and Safety: Large cap companies are typically well established and have a proven track record of performance. Their stability and established presence in the market make them generally safer investments compared to small or mid-cap stocks. This stability can be reassuring for investors seeking less volatility in their portfolios.
- Dividend Income: Many large cap companies offer regular dividends to their shareholders. These dividends can provide a reliable income stream for investors, making them particularly appealing to those seeking income generating investments.
- Liquidity: Large cap stocks are often more liquid than small or mid-cap stocks, meaning there is usually a larger number of shares being traded daily. This can make it easier for investors to buy and sell shares without significantly impacting the stock price.
- Blue-chip Status: Large cap stocks are often referred to as “blue-chip” stocks, which signifies that they are well-established, financially sound, and have a strong market presence. Investing in blue-chip stocks can provide a sense of security and confidence in your investment choices.
- Potential for Growth: While large-cap stocks may not offer the same level of growth potential as small or mid-cap stocks, they can still provide solid returns over the long term. Large-cap companies have the resources and expertise to capitalize on growth opportunities and adapt to changing market conditions.
- Diversification: Including large cap stocks in your investment portfolio can help diversify your risk. Large-cap stocks often have exposure to different sectors and industries, which can help mitigate the impact of a downturn in any single sector.
Overall, investing in large cap stocks can be a advisable choice for investors looking for stability, income, and the potential for long term growth in their investment portfolio.
Who should invest in large cap stocks?
Investing in large-cap stocks can be suitable for a wide range of investors, including those who prioritize stability and consistent returns. Specifically, investors who are risk-averse or looking to preserve capital may find large-cap stocks appealing due to their established track record and lower volatility compared to small or mid-cap stocks.
Additionally, investors seeking regular income through dividends may also be drawn to large-cap stocks, as many of these companies pay out dividends to their shareholders. Overall, large-cap stocks can be a prudent choice for investors with long-term investment goals who value stability and potential income generation.
Benefits of investing in large cap funds
Large-cap stocks offer many benefits to investors, some of which are as follows:
Stability
Large-cap funds typically invest in companies with a proven track record of stability and consistent growth. These companies are leaders in their respective industries and have a strong presence in the market with established business models. So, large-cap funds provide stability, reducing the risk compared to investing in stocks of smaller or less-established companies. These funds are a reliable choice for conservative investors.
Lower volatility
Large-cap stocks are less volatile than small-cap or mid-cap stocks. Since the companies issuing these stocks have a large market capitalization, they tend to be more resistant to market fluctuations, economic downturns, and industry-specific challenges. Investing in large-cap funds can help reduce portfolio volatility and provide a smoother investment experience.
Dividend yields and steady income
Many large-cap companies pay regular dividends to their shareholders. These dividends can provide a consistent stream of income to investors. Large-cap funds often include companies with attractive dividend yields, making them an attractive choice for investors seeking regular income.
Risks associated with large cap stocks
While large cap stocks offer several advantages, you cannot overlook their associated risks. Here are some common risks involved:
Slower growth
Large companies generally offer slower growth potential due to their size and maturity. Since they are established companies, they take time to grow higher. These companies may find it challenging to generate substantial growth rates compared to smaller, fast-growing companies. While large-cap stocks are more stable, they might not offer potential for rapid capital appreciation.
Limited agility
Large-cap companies often have extensive bureaucracies and complex decision-making processes. This can hinder their ability to adapt quickly to changing market conditions or technological advancements. Smaller, more nimble competitors may outmaneuver large-cap companies, impacting their market share and profitability.
Overvaluation
Large-cap stocks are often widely followed by analysts and investors, which leads to increased market scrutiny and potential overvaluation. If the market has excessively priced a large-cap stock based on unrealistic expectations, it can result in a correction or decline in its value when those expectations are not met.
To conclude
It’s important to note that while large-cap stocks are more stable, they are not 100% immune to market fluctuations or business challenges. Investors should conduct thorough research and consider various factors, including the company’s financial health, competitive position, and industry trends before making investment decisions.
Frequently asked questions
How is market capitalization determined for large cap stocks?
Market capitalization (market cap) for a large-cap stock is determined by multiplying the current market value of a company’s stock by the total number of outstanding shares. The market price is the current trading price of the stock in the stock market, and outstanding shares are the total number of shares issued by the company that are available for trading.
What is the typical range for market capitalization of large-cap stocks?
The specific range for large-cap stocks can vary depending on the market and the prevailing conditions. But generally, companies with a market capitalization of Rs 20,000 Crore or more are considered large-cap stocks. However, this range is not fixed, and different investors or financial institutions may have their own criteria for defining large-cap stocks.
What are some examples of large-cap stocks?
Examples of large-cap stocks can vary over time as market conditions change. However, in 2023, some well-known large-cap stocks include HDFC Bank, Hindustan Unilever, Reliance Industries, Infosys, and ITC Limited.
How can I invest in large-cap stocks?
You can invest in large-cap stocks through a brokerage account, Exchange-Traded Funds (ETFs), Mutual Funds, or Index Funds.
How is a large-cap stock different from a small-cap or mid-cap stock?
Large-cap stocks are generally larger and more established companies than small-cap and mid-cap stocks. Small-cap stocks have smaller market capitalizations and are often associated with relatively newer or less-established companies. Mid-cap stocks fall between large-cap and small-cap stocks in terms of market capitalization.