Home Beginner Market Structure Understanding The Basics Of Market Capitalization – Large Cap

Understanding The Basics Of Market Capitalization – Large Cap

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Introduction

Due to the enormous number of stocks in the market, the shares are classified based on their characteristics. For example, based on their market capitalisation, stocks are categorised as small-cap, mid-cap, and large-cap. Well, the meaning of each lies within the name. For example, small-cap companies have a small capitalisation; large-cap companies have a large capitalisation, and mid caps lies in between the two. Moving forward, the discussion will be confined to large-cap.

Market Capitalization

Let us first understand about market capitalisation before getting in detail about the large caps. Market Capitalisation is the value of the company’s outstanding shares. It is basically the size of the company in the market. Market Capitalisation is an essential characteristic of a company. It is useful to investors for taking investment decisions. The calculation of market capitalisation is quite simple. The present share price multiplied by the total number of shares gives the market capitalisation of a company. The market capitalisation changes spontaneously due to the continuous change in the share price.

What is a Large Cap?

Splitting up the word, a large cap is a company with large market capitalisation. If the market capitalisation of a company is above $10 billion, it falls under the large-cap sector. For example, a company about 10 billion shares with its current share as $5, the market capitalisation will be $50 billion. In the calculation of market capitalisation, the total number of outstanding shares is considered to be more significant than the current share price. A company with a share price as $1 can still come under the large-cap category if it has at least 10 billion outstanding shares with it. The large-cap companies are usually given the highest priority in the market. Also, the indices of counties are composed mostly of large-cap stocks.

Investors keep their portfolios well diversified. It includes a mix of large-cap, small-caps, and mid-caps. However, the investors are often most reliable on the large-cap stocks they carry the least amount of risk compared to the small and mid caps. However, they do not provide returns as much as small and mid-caps. Therefore, an investor’s portfolio is usually composed of all three types of market capitalisations.

Advantages of investing in Large Cap Stocks

Stability: Out of the main three types of market capitalisations, large caps are the most stable ones. Due to their size, large caps are known for their stability. There is a more significant risk factor in small and mid-cap. An economic crisis can lead to a substantial impact on these stocks. However, that is not the case with a large cap. Large caps are not as severely affected as small and mid-caps during a crisis.

Dividend payers: As discussed above, large caps often pay a dividend to their customers when their company is doing quite well. As these companies are already well-established, they do not provide as many returns as small-cap and mid-cap stocks. So, providing dividends can be excellent compensation.

Availability of information: As these companies are in the market for a significant amount of time, information about the company is available almost everywhere on the internet. This makes it valuable for investors who are looking forward to investing in a large-cap company.

Liquidity: Large-cap stocks highly liquid, unlike the mid-cap and small-cap which face problems in liquidity.

Summing it up, large-cap stocks are strong, reputable, and trustworthy and also carry the least amount of risk. Large caps are a perfect choice of investment for the ones who are looking to invest lump sum; as it provides a steady and dependable performance in the long-term. Also, these stocks can withstand any market turbulence.

Why investing in Large Caps is not the best option

  • Large-cap generates lesser gains compared to small cap and mid cap. For those looking to obtain high returns, large caps might not be the best choice for them. Similarly, as it does not carry many risks, it not suitable for the investors who are willing to risk their investment for high returns.
  • Not a good investment for short-term: Large caps do not provide good returns in the short-term. Hence, they are suitable only for long-term investors.

Large Cap vs. Small Cap

According to research, large-cap companies seem to outperform after some years of the expansion phase of the business cycle. On the other hand, small-cap stock outperforms when the economy is recovering from a recession. During the contraction phase, the small-cap sector does not see much growth and most likely go out of business. However, large caps are well-established, so do not face any such problems. From an investment point of view, large caps are almost risk-free, while, small caps are riskier than both large and mid-caps. As the large caps have less risk, their returns are also less. While small caps with more risk, generally provide better returns.

What is a Blue Chip Large Cap?

First of all, let us understand what a blue-chip stock is. They are the stocks that belong to the large cap, which are well established and are financially strong and have been in the business for a long time. There is a fragile line difference between blue-chip stocks and large-cap stocks. Almost all the blue-chip stocks are large caps, but not all large-cap stocks are a blue chip. A blue chip large cap stock is like the cherry on the cake. The most important feature of blue chip large cap stocks is that they have diversified businesses. If one of the company’s activities is doing poorly, it does not mean that the company’s stock will fall, because there can be another business that could be doing well. Therefore, the balance is always maintained, and the stock prices generally do not see any significant fall. This is how diversification can be helpful to the stocks. It also reduces risk along the way.

Large Cap indexes in the US

Well, the large-cap indexes in the US are one of the most heavyweight indexes across the globe. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are the three most followed indexes in the US. The S&P 500 Index is an index with the top 500 companies in the US by capitalisation. It represents 80% of the total value of the US market. Therefore, the performance of the US markets can be determined by the S&P 500 Index. The Dow Jones Industrial Average (DJI) is one of the oldest and the most famous index in the US and around the world. It is composed of 30 largest companies in the US. Other large-cap indexes in the US include the S&P 100, the Dow Jones U.S. Large-Cap Total Stock Market Index, the MSCI USA Large-Cap Index, and the Russell 1000.

There are numerous numbers of ETFs that track the large-cap companies. Some of the most famous and ETFs in the US are SPDR S&P 500 ETF, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF. These are the ETFs that track the S&P 500 Index. Similarly, SPDR Dow Jones Industrial Average ETF tracks the Dow Jones Industrial Average Index, and the iShares Russell 1000 ETF tracks the Russell 1000 Index.

Large Cap Indexes and ETFs in Europe

Just like the US, Europe, too, has quite a lot of indexes which include the large-cap companies. For example, EURO STOXX 50 Index is an index designed by STOXX. EURO STOXX 50 is composed of 50 large blue chip companies in the Euro Zone. The STOXX Europe 600 is another index from STOXX, which is made up of all types of market capitalisations. Finally,  FTSEurofirst 300 index is composed of the 300 largest companies in terms of capitalisation in the FTSE Developed Europe Index. If one wants to invest in the large-cap companies, they can look into investing in the large-cap ETFs, which performs very similar to the large-cap index. Some of the largest ETFs are iShares EURO STOXX 50 UCITS ETF, Lyxor EURO STOXX 50 UCITS ETF, and the iShares Core EURO STOXX 50 UCITS ETF. All of these keep track of the 50 largest companies in the Eurozone.

Bottom line

The key to gain good returns is diversification. The more diverse one’s portfolio is, the better are their returns. Investing all the capital into large caps thinking that they’re safe might not be a good investment idea. Rather having a balance of all types of stocks (large cap, mid cap, and small cap) can definitely ensure better returns. Also, if you’re a beginner, it is recommended to invest in a mutual fund as it keeps your capital much safer.

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