Large Cap Stocks and Funds With Their Effect on the Economy

3 Reasons to Invest

Large Cap Company
••• Photo by Jason Kempin/FilmMagic/Getty Images

Large cap stocks are shares of a company with a market capitalization of more than $5 billion. Capitalization is the company's stock price times the number of shares.  These are the well-known companies you hear about in the news. There are large-cap companies worth more than the economic output of many small countries. 

You can invest in individual large cap companies by buying their stocks. That requires you to research each firm to decide which picks are good.

You can also invest in many large cap companies at the same time with mutual funds. You still have to research them, but that reduces your risk. Funds provide diversification. They give you the best return for the least risk over time.

Three Reasons to Invest in Large Cap

Here are three compelling reasons to invest in large cap stocks or mutual funds.

1. Large cap companies are stable. This size makes them less likely to go out of business, so they are a safer investment than small cap companies. But their stock prices may not grow as fast as smaller companies. It's hard for them to quickly grow when they are already the market leader. Most of these companies are the top business in their industry.

2. Investors flock to large cap companies during the downturn in the business cycle. They are a safer investment. That doesn't mean they are immune to recessions. It just means they are more likely to withstand a slowdown without going out of business altogether.

3. These stocks pay dividends. That creates another source of income for conservative investors. The companies pay dividends because they know the stock price probably won't appreciate in value as fast as a growth company. These companies may be very profitable, but just don't have opportunities to grow.

They must compensate investors for the stagnant stock price and have the earnings to do it with dividends. Also, the dividend payments are a useful source of income when bond yields are low. That happens when the government is trying to stimulate the economy. The Federal Reserve lowers the fed funds rate and all other interest rates fall as a result.

Large Cap Versus Small Cap Pros and Cons

Research shows that large cap stocks outperform the market during the later years of the expansion phase of the business cycle. In this phase, the economy is growing briskly. Individual investors have gained enough confidence to buy stocks. They favor large cap companies with brand names they recognize. 

Small cap stocks outperform the market during the early years of a recovery. That's when the economy is pulling out of a recession. The simple organizational structure of small companies allows them to make decisions faster. They can change direction in time to take advantage of shifts in the economy.  Small cap growth slows as the business cycle moves into the contraction phase of the business cycle. They are more likely to go out of business. They don't have the resources, such as cash reserves, to sustain an unprofitable downturn.

 

Blue Chip Large Cap

Many large cap companies are also blue chip stocks. These are the cream of the crop. They pay dividends, have little debt and a long history of stable earnings. Most important, they represent diversified businesses. That makes them less vulnerable to market changes. If one of their businesses has a bad year, that won't affect the stock price very much. That's because another one of their businesses could be having a great year. For this reason, owning a blue chip stock gives you instant diversification. That reduces your risk. 

Oddly enough, the name "Blue Chip" came from the world of poker. The blue chip traditionally represents the highest denomination. If you cash in a blue chip, you will receive the most money. 

Examples of Large Cap Companies

These are the top 10 largest U.S. companies by market capitalization.

  The market cap changes daily.

This is not a recommendation to buy. For that, you would need to consult with a qualified financial planner. It's always a good idea to purchase stocks based upon your personal financial goals.​

RankCompanyMarket Cap in Billions on 2/23/18IndustrySymbol
1Apple $872TechAAPL
2Alphabet $767SoftwareGOOGL
3Microsoft $714SoftwareMSFT
4Amazon $711RetailAMZN
5Facebook $511SoftwareFB
6Berkshire Hathaway  $501DiversifiedBRK-A
7JPMorgan Chase $398BanksJPM
8Johnson & Johnson $352PharmaJNJ
9Bank of America $328BanksBAC
10Exxon Mobil $321EnergyXOM