And reasons you might choose them over small-cap stocks
A company's market capitalization (cap) can be found by multiplying its share price by the number of outstanding shares it has. For example, if Company ABC's share price is $50, and it has 1 million outstanding shares, its market cap would be $50 million. Large-cap stocks are shares of a company with a market cap of more than $10 billion. These are the well-known, well-established companies, and some are worth more than the economic output of many small countries.
While large-cap investments are less risky than small-cap investments, you should still do thorough research before buying any stocks. Consider using mutual funds, which allow you to invest in many large-cap companies at once. You should always do some research, but the diversification that mutual funds provide reduces your risk and eliminates the task of having to research individual stocks to build a portfolio.
Reasons to Invest in Large-Cap Stocks
One of the main reasons to invest in large-cap stocks is their size makes them less likely to go out of business, so they are a safer investment than small-cap companies. Investors usually flock to large-cap companies during a contraction in the business cycle. 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.
The downside is their stock prices may not grow as fast as smaller companies because it's hard to grow quickly when you already lead the market, and most of these companies are at the top of their industries. However, they pay dividends to compensate investors for the stagnant price. Most smaller companies won't pay out dividends because they need to reinvest the profits for continued growth.
The dividend payments are ideal for conservative investors and those who invest for passive income because it adds another income stream, and is reasonably reliable. They are also a useful source of income when bond yields are low, which happens when the government is trying to stimulate the economy.
Large-Cap vs. Small-Cap
Large-cap stocks tend to outperform the market during the later years of the expansion phase of the business cycle when the economy is growing briskly. Mainly because individual investors have gained enough confidence to buy stocks, and they favor large-cap companies with brand names they recognize. On the other hand, small-cap stocks—which are companies with a cap between $300 million and $2 billion—outperform the market during the early years of recovery.
The simple organizational structure of small companies allows them to make decisions faster, and 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, which is when small-cap companies are more likely to go out of business because they don't have the resources and cash reserves to sustain during an unprofitable downturn.
Knowing where the economy is in the business cycle can help you make decisions about your investments.
Many large-cap companies are also blue-chip stocks, which are well-known companies with a history of growth and constant dividend payouts. These are the cream of the crop. They pay dividends, have little debt, boast a long history of stable earnings, but most importantly, they represent diversified businesses—which makes them less vulnerable to market changes.
If one of their businesses has a bad year, it won't affect the stock price very much because one of their other businesses is likely to have a good year. Owning a blue-chip stock gives you instant diversification and reduces your risk.
Top 10 Companies by Market Cap
These are the top 10 largest companies by market capitalization as of April 2020.
|Rank||Company||Market Cap in Billions on 4/24/2020||Industry||Symbol|
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Federal Reserve Bank of San Francisco. "What Are Business Cycles and How Do They Affect the Economy?" Accessed April 24, 2020.
Treasury. "Daily Treasury Yield Curve Rates." Accessed April 24, 2020.
SEC. "Stocks." Accessed April 24, 2020.
Yahoo! Finance. "Home." Accessed April 24, 2020.