What Are Large-Cap Stocks?

Choosing the right companies and types of stocks to invest in can be one of the most challenging aspects of building your portfolio. This is your time to decide what type of investor you want to be and how your decisions will affect your long-term goals.

Whether you are beginning your investment journey or have been trading stocks for years, it’s important to understand what types are available and how they could benefit you over time. Choosing to focus on large-cap stocks is just one of the many options you have as an investor. Before you jump right in, it’s important to learn how to differentiate between large-cap, mid-cap and small-cap stocks in order to help you make an informed decision about your investment needs.

Large-Cap Stocks

There are many ways to measure a company’s size, but market capitalization is one of the most popular approaches. A company’s market capitalization, also referred to as market cap, is determined by multiplying the number of outstanding shares by the stock’s current stock. For example, a company with 25 million shares trading at $100 per share would have a market cap of $2.5 billion (25 million × $100 = $2,500 million, or $2.5 billion). The market cap figure shows the public’s opinion of a company’s worth. It has become common to classify the range of various sizes into three broad groups: large cap, mid cap or small cap.

Large-cap stocks refers to the group of companies that fall into the largest market-cap bracket. You may see large-cap stocks also referred to as “big caps” or even “mega caps.” As a rule of thumb, large-cap stocks trade with a market cap greater than $10 billion.

How to Differentiate Between Large-Cap, Mid-Cap and Small-Cap Stocks

If you’re considering what types of companies to invest in, you may be wondering how to differentiate between large-cap, mid-cap and small-cap stocks beyond their size. The main differences are:

Large-cap stocks: As mentioned above, large-cap stocks are companies with a valuation of $10 billion or more. They constitute less than 15% of the number of exchange-traded companies in the U.S. but account for over 80% of the total value of the stock market. A lot of wealth is represented by these large-cap stocks that are generally household names. First off, these companies tend to be less volatile than mid- or small-cap stocks, falling less when major events cause downturns in the stock market. They are more likely to have a greater international reach than smaller firms. Additionally, they are closely followed by the media and analyst community. Lastly, many are mature firms with a good dividend history, but you will also find recent disruptive companies that have risen to the large-cap rank.

Mid-cap stocks: Companies trading with a market cap between $2 billion and $10 billion are classified as mid-cap stocks. It can be difficult to categorize mid-cap stocks. They can be firms rapidly growing and in the expansion phase of their life cycle, or former large-cap companies that are on the decline and have fallen out of favor with the market.

Small-cap stocks: Generally, companies with a market cap of less than $2 billion are considered small caps. Small-cap companies will normally have the lowest level of analysis coverage in the investment community. Small-cap companies are more likely to be focused on the domestic marketplace. You can find both emerging stars and fallen angels within the small-cap universe. Small-cap stocks tend to fall deeper and faster during broad market downturns, but then often take the lead when the stock market recovers.

What Are the Benefits of Investing in Large-Cap Stocks?

Since large-cap stocks are companies with market caps over $10 billion, there are numerous investment benefits:

• They often consist of mature companies with a good dividend history.
• Strong liquidity makes it easier to purchase and sell positions without distorting the market price.
• They are represented by a diversified range of industries.
• Generally, they are less volatile and have more predictable returns than smaller companies.
• They are closely followed and well-researched by analysts and fund managers, which makes it easier to evaluate large-cap companies and helps to keep the companies honest.
• Deeper access to resources makes them less likely to go out of business in times of trouble.

Overall, the main benefit of investing in large-cap stocks is that they offer greater stability during volatile environments than mid- and small-cap stocks do.

Every portfolio requires some balance to reach your investment goals, and putting money into big caps helps achieve this balance. A well-balanced portfolio will include a mix of large-cap, mid-cap and small-cap stocks in order to prepare for your short- as well as long-term goals. If you’re looking for helpful resources to learn how to allocate your assets, enroll in an AAII membership.

If you’re someone who is just getting started with investing, you may want to see if investing in large-cap stocks could be beneficial in the long run. During volatile periods in the stock market, big caps may be better at riding out pricing fluctuations or larger shifts in the economy. Large-cap stocks also offer more transparency than smaller companies do.

Other Types of Large-Cap Stock Investments

You can invest in large-cap stocks directly or through a large-cap mutual fund or large-cap exchange-traded fund (ETF). Some funds may be actively traded, so the manager is trying to outperform the market by making specific company, industry and market selections, while other ETFs and mutual funds simply follow a large-cap index such as the S&P 500. Even within the universe of large-cap stocks, some companies are more growth focused, while others are more value oriented.

Understanding how to differentiate between these types of investments and what their benefits include can help you determine if these are smart additions to your portfolio.

Large-Cap Growth Stocks

Large-cap growth stocks fall into a specific category that includes companies projected to grow faster than the overall economy and other big caps. Some examples of large-cap growth stocks are Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Adobe Inc. (ADBE), Intuit Inc. (INTU), Uber Technologies Inc. (UBER) and Tesla Inc. (TSLA). These can change if their earnings stagnate, or if investors or financial analysts believe they are in a state of decline.

Growth is defined based on two major factors:

Expedited growth: Increased growth rates for earnings, sales, book value and cash flow.

High valuations: Higher growth stocks often trade with high price ratios (which means the company’s price-earnings ratio, also known as a P/E ratio, is more elevated than other organizations in its industry) and low or even no dividend yields (when the company’s share price is higher than the dividend payments the shareholder will eventually get back).

Large-Cap Value Stocks

In contrast to large-cap growth stocks, value stocks are often slower-growing firms that are considered attractively priced relative to measures such as earnings, sales, cash flow or dividends. While value stocks may have lower growth potential, they can be attractive investments if the company is well-managed, financially sound and the shares can be purchased at an attractive price.

Large-cap value stocks are typically found within the financial, utility and industrial industries. A few examples of large-cap value stocks would be Berkshire Hathaway (BRK.B), Procter & Gamble Co. (PG), and JPMorgan Chase & Co. (JPM).

What Are Large-Cap Index Funds?

If you’ve been perusing online, you may have noticed the term, “large-cap index funds.” First off, index funds are portfolios of stocks or bonds that are specifically designed to mirror the performance of a financial market index.

A large-cap index such as the Russell 1000, includes around 1,000 major large-cap stocks that are chosen based on their market value and history. These are considered the highest-ranking publicly traded stocks in the U.S. exchange.

Benefits of Large-Cap Index Funds

Investing in large-cap index funds has similar benefits to direct ownership of big caps, as they offer the potential for growth and dividend income at a low expense. People who are looking for long-term investment opportunities may choose large-cap funds instead of individual stocks for greater diversification and broader market exposure coupled with professional portfolio management. Many people choose to invest in the S&P 500, because it is a stock market index that tracks the performance of the 500 largest companies in the U.S. as measured by market cap and offers great diversification.

If you’ve done research online about large-cap index funds, you might have come across the term, “large-cap growth ETFs.” These ETFs invest in large-cap companies with a focus on growth that can be organic or through acquisition. Growth companies typically aim to reinvest most of any earnings they accrue over the year in order to accelerate their future growth. In contrast, companies with lower growth prospects are more likely to use their excess earnings to pay meaningful dividends and fund share buybacks. Note that majority of ETFs are index funds and are not actively managed.

Differences Between Market Cap-Weighted and Equal-Weighted Indexes

There are two major investment approaches you can choose from when it comes to picking an index to follow. Following a market-cap-weighted index means you invest more of your money into companies that have a higher value for their outstanding shares. In comparison, following an equal-weighted index means you purchase the same number of shares within each company that is in the index.

Depending on your investment strategy, choosing to buy shares in a market-cap-weighted versus an equal-weighted index will have different results. In many cases, market-cap-weighting favors the largest stocks, while equal-weight index funds give smaller stocks increased exposure.

Are Large-Cap Stocks a Good Investment?

Investing in large-cap stocks can be a relatively safe option if you’re looking for steady growth with reliable profit streams. They often form the core of an investor’s portfolio and can be complemented with assets such as international stocks or even domestic small-cap stocks which may offer further diversification and the possibility of higher long-term returns.

Deciding whether to invest in large-cap ETFs, funds or stocks will ultimately depend on your individual investment goals, interest in managing a portfolio of stocks directly and risk tolerance. Once again, if you are searching for large-cap stock recommendations online, make sure to do your due diligence before investing.

Now that you know how to differentiate between large-cap, mid-cap and small-cap stocks, you’re ready to invest. Our A+ Investor product offers a suite of tools that helps investors monitor their assets, discover new opportunities and learn which strategies could help them achieve their goals. By subscribing to A+ Investor, you can get access to our fundamental stock screening and research database programs.

For more information on monitoring your portfolio, determining specific investment goals and learning about financial education, be sure to visit AAII.com to sign up for a risk-free trial today.