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What are Large-Cap Stocks?
The term cap is short for market capitalisation. It is a measure of quantifying a company’s value with the help of the total number of existing shares multiplied by the price of each unit. Large-cap stocks are, therefore, shares issued by a company with large market capitalisation.
As per this valuation, there are three primary types of capped companies – large-cap, mid-cap, and small-cap.
The following table demonstrates the classification.
|Small-cap companies||Mid-cap companies||Large-cap companies|
|Below Rs. 5,000 Crore||Within Rs. 5,000 – 20,000 Crore||Above Rs. 20,000 Crore|
All large-cap companies are listed at the top of recognised stock exchange indices around the world. India’s Nifty 50 hosts the top fifty large-cap stocks in India which are the most traded in the stock market.
Some stocks in this category are also called blue-chip stocks as in most cases the companies owning these stocks (blue-chip companies) are leaders of their respective industry or are one of the leading three figures in it. They have wide market recognition, productivity, and financial soundness. Therefore, such stocks are the most sought after stocks in the market.
Features of Large Cap Stocks
Some of the features of large-cap stocks are discussed below –
- Moderate-returns: Large-cap companies are well-established and have attained financial maturity. Therefore, their shares’ value cannot appreciate as much as the values of mid-cap and small-cap stocks. Returns on such stocks are mainly derived from the dividend component.
- Low-risk: Large-cap companies have a robust financial infrastructure, fortitude, and soundness. Ergo, large-cap shares react mildly to market volatility. It significantly lowers the risk on such investments, because, unlike mid-cap and small-cap companies, they do not run the risk of dissolution during market contraction, and can still afford to continue their business operations.
- Rich history: Companies in large-cap stocks list have been in business for a long period. They possess a rich operational history accessible to the general public through various means, thus reposing trust. It can be used by potential investors for analysis.
- Expensive: These stocks are, in most cases, more expensive than other investment options.
- Liquid: They are the most liquid investment options in the market because of their widespread popularity and readily available buyers.
Why Should You Invest in Large-Cap Stocks?
Here are some reasons why you should include large-cap stocks in your investment portfolio –
- Stability: Large-cap shares offer stability to your investment portfolio. It is highly unlikely that a large-cap company will be rendered insolvent or inoperative by a bearish market or during a significant market crisis. Therefore, it can, to some degree, balance any losses suffered by you through other securities in your portfolio during a market slump.
- A regular flow of income: The primary source of income from large-cap stocks is through dividends and not capital appreciation. Therefore, although it might not yield substantial capital gains upon sale or transfer of the same, you are assured of regular dividends. This factor can compensate for the lack of periodical returns from other kinds of securities.
- Availability of information: Unlike mid-cap and small-cap companies, large-cap companies in India are obligated to provide access to their financial statements and other necessary documents to the general public. Their profitability and operations thus provide a comprehensive view of their performance in a large-cap stocks list. Such information is imperative for sound investment conduct. Therefore, you can assess this information against your portfolio to see what best complements it.
Inclusion of these stocks allows you the much-needed balance in your investment portfolio. You can thus make the large-cap stock as the centre and form your investment portfolio around it. This method will ease the investment process.
Drawbacks of Large-Cap Stocks?
The two major drawbacks of stocks in the large-cap are –
- Low capital appreciation: One of the major drawbacks of large-cap stocks is their limited potential for capital appreciation. Due to their mild response to market fluctuations, the stock values do not go up as much as mid-cap and small-cap stocks during the bullish market.
- Expensive: Investments in large-cap stocks in India require substantial capital; which is why individuals with low disposable income cannot afford to invest in these stocks.
- Rare: Presently, only a handful of large-cap companies exist in India after the recent SEBI categorisation.
Therefore, if you are entering the market with low disposable income and an objective of high-return, then you should opt for other options to employ your capital.
Some Alternative Options to Large-Cap Stocks?
Here is a list of alternative investment options –
- Mid-cap stocks: Mid-cap stocks have recorded a better performance in the past few years. Although they are more volatile and do not come with a promise of regular dividends, these companies show immense potential for capital appreciation.
- Exchange-Traded Funds: ETFs are a type of Mutual Funds that are traded on recognised stock exchanges. These funds can include shares and fixed income securities such as debentures, treasury bills, bonds, etc. Exchange-Traded Funds are a lucrative option for novice investors as they exhibit stock-like characteristics and other factors such as low-cost and tax efficiency.
- Equity Funds: They are a form of Mutual Funds where the pooled investment is used to purchase equity shares or stocks. They offer returns similar to stocks while minimising the risk factor.
- Multibagger: Multibaggers are those stocks which provide manifold returns on the employed capital. They are known for their low cost and return in multiples of the investment amount. For instance, if investment returns double the investment amount, it is called a double-bagger.
In case you are new to the market, you can consult a market professional or seek an investment platform that offers you complete information on stocks,for better guidance on the market dynamics. Invest only after considering your investment objectives, feasibility, and affordability.