The Benefits of Large-Cap Stocks

And 3 Reasons You Might Choose Them Vs. Small-Cap Stocks

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Large-cap stocks are shares of a company with a market capitalization of more than $5 billion. 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. 

A company's total capitalization is the company's stock price times the number of shares. You can invest in individual large-cap companies by buying shares. While large-cap investments are less risky than small-cap ones, you should still do thorough research before buying any stocks.

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

Three Reasons to Invest in Large-Cap Stocks

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 grow quickly when they already lead the market, and most of these companies are at the top of their industries.
  2. They are safer in a downturn: Investors 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.
  3. These stocks pay dividends: These stocks create 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. They must compensate investors for the stagnant stock price and have the earnings to do it with dividends. These payments are an especially useful source of income when bond yields are low, as happens when the government is trying to stimulate the economy.

Large Cap Vs. Small Cap

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. 

On the other hand, small-cap stocks outperform the market during the early years of a recovery. 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. During this phase, small-cap companies are more likely to go out of business. 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.

Blue-Chip Large-Cap Stocks

Many large-cap companies are also blue-chip stocks. These are the cream of the crop. 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. 

Its an apt name for these high-performing stocks. Blue-chip companies pay dividends, have little debt, and boast 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, it won't affect the stock price very much because another of their businesses is probably having a great 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 August 1, 2019. The market cap changes constantly, following the ups and downs of the stock price.

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.​

Rank Company Market Cap in Billions on 8/01/2019 Industry Symbol
1 Microsoft $1058 Software MSFT
2 Apple $959 ($1T on 8/2/18) Tech AAPL
3 Amazon $959 ($1T on 9/4/18) Retail AMZN
4 Alphabet $839 Software GOOGL
5 Facebook $550 Software FB
6 Berkshire Hathaway $496 Diversified BRK-A
7 Tencent $436 Diversified TCEHY
8 Alibaba $431 Diversified  BABA
9 Visa $389 Financial V
10 JPMorgan Chase $366 Financial JPM