A company's market capitalization or "cap" is its share price times the number of outstanding shares it has. Its market cap would be $50 million if its share price is $50 and it has 1 million outstanding shares.
Large-cap stocks are shares of a company with a market cap of more than $10 billion. These are well-known, well-established companies. Some are worth more than many small countries. Large-cap investments are less risky than small-caps, but you should still do thorough research before buying any stocks.
Reasons to Invest in Large-Cap Stocks
One of the main reasons to invest in large-cap stocks is their size. It makes them less likely to go out of business. This makes them safer than small-cap companies.
Investors tend to flock to large-cap stocks during a contraction in the business cycle. This doesn't mean that these stocks are immune to recessions. It just means that they're more able to withstand a slowdown without going under.
The downside is that their stock prices may not grow as fast. It's hard to grow quickly when you already lead the market. Most of these companies are at the top of their industries. They pay dividends to make up for the stagnant price. Most smaller companies won't pay out dividends because they must invest their profits for growth.
Dividend payments are ideal for conservative investors. They work well for those who invest for passive income. They add another income stream and can be a useful source of income when bond yields are low.
Bond prices can drop when the government is trying to stimulate the economy.
Large-Cap vs. Small-Cap Stocks
Large-cap stocks tend to outperform the market during the later years of the expansion phase of the cycle. This is when the economy is growing briskly. Investors have gained enough confidence to buy stocks, and they favor large-cap companies with brand names they know. Small-cap stocks—companies with caps between $300 million and $2 billion—outperform the market during the early years of recovery.
The simple 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. This is when they are more likely to go out of business. They don't have the resources and the cash reserves to sustain during a downturn.
Knowing where the economy is in the business cycle can help you make smart decisions about your investments.
Many large-cap companies are also blue-chip stocks. These are well-known companies with a history of growth. They pay dividends and have little debt. Their earnings tend to be stable. They represent diversified businesses. This makes them less vulnerable to market changes.
It won't affect the stock price very much if one of their businesses has a bad year. One of their other businesses is likely to have a good year. Owning a blue-chip stock gives you instant diversification. It reduces your risk.
Top 10 Companies by Market Cap
These are some of the top 10 largest companies by market capitalization as of August 2021.
|Rank||Company||Market Cap in Billions on 4/24/2020||Industry||Symbol|
A Mutual Fund Option
You might want to think about using mutual funds. These funds allow you to invest in many large-cap companies at once. You should still do some research. But the diversification that mutual funds provide also reduces your risk. It avoids the task of having to research individual stocks to build your portfolio.