3 Reasons to Invest in Large Cap Stocks

Large Cap Company
Steve Jobs built Apple into a large cap company. Photo by Jason Kempin/FilmMagic/Getty Images

Definition: Large cap stocks are shares of a company with a market capitalization of over $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 the businesses to decide which are good picks. 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. That's because funds provide diversification. They give you the best return for the least risk over time.

3 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 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. That's because 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 usually happens when the government is trying to stimulate the economy. The Federal Reserve will lower the Fed funds rate, and all other interest rates fall as a result.

Large Cap vs. Small Cap Pros and Cons

Small cap stocks outperform the market during the expansion phase of the business cycle. That's when the economy is pulling out of a recession. That's because the simple organizational structure of small companies allows them to make decisions faster. They can change direction faster to take advantage of shifts in the economy.

But their growth slows as the business cycle moves into the peak and 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. (Source: Lorne N. Switzer, The Behaviour of Small Cap vs. Large Cap Stocks in Recessions and Recoveries, North American Journal of Economics and Finance, Vol.

21, pp. 332-346, 2010)

Blue Chip Large Cap

Many large cap companies are also blue chip stocks. These are the cream of the crop. In addition to being large, paying dividends, and being industry leaders, blue chips have little debt, a long history of stable earnings, and a diversified business. Oddly enough, the name "blue chip" came from the world of poker. That's because the blue chip usually represented the highest denomination. If you cash in a blue chip, you will receive the most money. (Source: Joshua Kennon, The Benefits of Owning Blue Chip Stocks)

Large Cap Companies List

To give you a better idea of what large cap stocks represent, here's a short list of some well-known large cap companies. These are in no order, and this is not a recommendation to buy. For that, you would need to consult with a qualified financial planner.

That's because it's always a good idea to purchase stocks based upon your personal financial goals.

  • Apple Inc.
  • Google
  • Microsoft
  • Berkshire Hathaway
  • Exxon Mobil
  • General Electric
  • Amazon
  • Intel. (Source: Large Cap Stocks, Dogs of the Dow, November 14, 2015)