Most investors understand the importance of diversification through asset allocation within a portfolio, which is meant to balance out the risk and reward trade-off between equity, debt and cash holdings. Under the equity or stock positions within a portfolio, however, investors have a wide array of investment options, each with different characteristics, advantages and disadvantages.
A large-cap stock investment, defined as the stock of a company with a market capitalization of $10 billion or more, is common among both growth and value investors as a portion of an overall asset allocation. Large-cap, or big-cap, stocks have unique advantages for investors, including stability in size and tenure, steady dividend payouts to shareholders and clarity in valuations.
Key Takeaways
- Large cap stocks are valued at greater than $10 billion in the market, making them more stable and mature investments.
- As a result, large cap stocks typically have lower volatility, greater analyst coverage, and perhaps a steady dividend stream.
- At the same time, they may have less growth potential and may lag the broader market in a bull swing.
Large-Cap Stability
The greatest advantage to adding large-cap stocks to an investment portfolio is the stability they can provide. Because large-cap companies are so large and have a well-established reputation with consumers, they are less likely to come across a business or economic circ*mstance that renders them insolvent or forces them to stop revenue-producing operations completely. Companies that are considered small- or mid-cap do not have the same level of stability, and therefore carry a greater degree of risk than large-cap investments.
Dividend Payouts
Another advantage to investing in large-cap companies is the potential for steady dividend payments. The stock prices for large-cap companies are not typically slated for high rates of growth over time because they are already well-established in the market. This can create a stagnant stock price and little-to-no capital appreciation for investors. However, despite the lack of rapid growth in terms of stock price, large-cap companies often pay dividends to compensate shareholders. These dividends can lead to impressive comprehensive returns for large-cap investors when they are added to the performance calculation over time. Large-cap stocks that pay steady dividends are common among income investors or those seeking income through relatively conservative investing.
Research and Valuation
Because large-cap companies often have a long business tenure, investors and creditors can easily obtain research on company operations and profitability levels. Publicly traded large-cap companies are required to provide shareholders and potential investors with accurate and periodic financial statements, allowing for ease in determining whether a company is worth the investment. In addition to research, company history and financial statements can be used in combination with current business activity to determine accurate valuation. These aspects play an important role in understanding the risk and potential reward of investing in a large-cap company.
Investors can use the Russell 1000 Index to find and evaluate large-cap companies, as this index compiles approximately 1,000 of the largest companies in terms of market capitalization operating within the United States. Large-cap investments can be purchased as individual shares of stock; through an exchange-traded fund, or ETF, that tracks a large-cap benchmark; or through one of the hundreds of available mutual funds focused on large-cap investments.
What the Experts Say:
Advisor Insight
Robert Schmansky, CFP®
Clear Financial Advisors, LLC, Livonia, MI
Large-cap stocks tend to be companies that are established in their markets with long-term histories. Some feel this makes them “safer” to invest in.
Larger company stocks also often pay dividends, allowing you to capture some of the return of your investment, which some investors view as a benefit. Rather than keeping their profits and investing it back into themselves, they may not benefit as much from using the cash, so they distribute it to owners.
Smaller companies have benefits as well. They can add diversification benefits to traditional portfolios which tend to be market-capitalization weighted (they invest more in large-cap stocks to better represent their share in the market).
Smaller companies have more room to grow; an investment that a small company makes may double their revenue. Meanwhile, that same investment by a larger company may not make a noticeable difference.
Overall, you should invest in a mix of stocks that represents your time horizon and tolerance for risk, including both small and large company stocks across the globe.
FAQs
Large-cap stocks tend to be companies that are established in their markets with long-term histories. Some feel this makes them “safer” to invest in. Larger company stocks also often pay dividends, allowing you to capture some of the return of your investment, which some investors view as a benefit.
What are the benefits of investing in large-cap stocks? ›
These companies are known for their consistent performance and stability, even in turbulent times. Their stock prices are more stable, with less volatility than those of smaller companies. This stability can lead to reliable growth over time, making large-cap stocks a preferred choice for long-term investors.
What are the advantages of common stock investments? ›
The potential benefits of investing in stocks include:
- Potential capital gains from owning a stock that grows in value over time.
- Potential income from dividends paid by the company.
- Lower tax rates on long-term capital gains.
Large-value stocks refer to those companies that are both large-cap (greater than $10 billion in market capitalization) and also value stocks. Large-value stocks are often mature and stable companies that pay regular dividends, attractive to lower-risk value investors.
Why are large caps better? ›
The tradeoff is that large-cap stocks are less risky and less prone to wild swings in their stock prices. As a result, large-caps are considered to be a more conservative investment choice than either small- or mid-caps. The primary benchmarks for the large-cap market are: S&P 500 Index.
Is it better to invest in large-cap or small-cap stocks? ›
Large caps tend to be more mature companies, and so are less volatile during rough markets as investors fly to quality and become more risk-averse. Shares of small caps and midcaps may be more affordable for investors than large caps, but smaller stocks also tend to have greater price volatility.
Should I invest in a large-cap? ›
Who Should Invest in Small Cap Vs Mid Cap Vs Large Cap? For conservative investors who are looking for long-term returns, a large-cap is the best option. If you are not expecting an aggressive return, you can go with large-cap funds. The risk involved in mid-cap funds is slightly higher than in large-cap funds.
What is the main advantage of investing in stocks? ›
Liquidity. Typically, common shares can be bought and sold more quickly and easily than other investments, such as real estate, art or jewellery. This means investors can buy or sell their investment for cash with relative ease. Advantageous tax treatment.
What are the advantages of investing in common stock? ›
In terms of performance, common stocks are known to generate higher returns than deposit certificates, bonds, etc. among other investment tools. Also, there is no limit up to which investors can benefit from their investment in common stock shares.
What are 2 advantages of preferred stock over common stock? ›
On the pro side, some of the best reasons to consider preferred stock include:
- Consistent dividend income, with fixed payout amounts and payment dates.
- First priority to receive dividend payouts ahead of common stock shareholders or creditors.
- Potential for larger dividends, compared to common stock shares.
Large-cap growth funds are generally considered to be safer than other stock funds because they invest in large, well-established companies.
What features do large-cap stocks have? ›
Large-cap companies are considered to be low-risk investment options owing to their financially stable nature. These stocks are less prone to market volatility and are generally capable of holding their value during economic downturns.
Should I only invest in large-cap funds? ›
Small caps as a whole have outperformed large caps over time. Because of their relatively small size, they tend to have more growth potential. Small caps have fewer financial resources and are generally less robust. The stocks of smaller companies tend to be more volatile than their larger peers.
What are the advantages of large-cap funds? ›
Large-cap mutual funds are not significantly affected by market fluctuations and show low volatility compared to middle and small-cap funds. Initially, the returns may seem low for the short-term period, but a large-cap fund has better returns in the long run.
Why are large-cap funds safe? ›
Large-cap stocks tend to be companies that are established in their markets with long-term histories. Some feel this makes them “safer” to invest in. Larger company stocks also often pay dividends, allowing you to capture some of the return of your investment, which some investors view as a benefit.
What does large-cap mean in investing? ›
Large cap refers to a company with a market capitalization value of more than $10 billion. Also referred to as “big cap,” large cap describes a class of popular stocks preferred by investors for their stability. Video Player is loading.
Is it better to invest in mid-cap or large-cap? ›
Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid caps may offer more growth potential than large caps, and possibly less risk than small caps. Small-cap stocks tend to be, on average, least developed publicly traded companies, although there are exceptions.
When should I invest in large-cap funds? ›
Long-Term Investor: large cap mutual funds are known to perform well over a long period of time. Given that there are minimal risks, and it is not completely risk-free, these funds are known to face short-term market fluctuations. Therefore, it is advised to stay invested in these funds for the long term.
What are the disadvantages of large-cap funds? ›
Additionally, investments in large cap funds may help investors diversify their portfolios. However, these funds may be subject to certain drawbacks – they may have lower returns and high tax implications. These funds may be suitable for risk-averse investors seeking a long-term investment.
