What are Large-Cap Stocks? Features and Drawbacks

In the stock market, the stocks are typically categorised according to their market capitalisation, which are large-cap, mid-cap, and small-cap. Everyone interested in the stock market should learn about the different categories of market cap to understand a stock better. In this article, learn about large-cap stocks in detail. 

Market Capitalisation and Its Categories

Market capitalisation, which is also known as market cap, is the total value of a publicly listed company’s outstanding shares of stock. It is calculated by multiplying the stock’s current market price with the total number of outstanding shares of the company.

For example, if a company has 1,000 shares currently trading at ₹50 per share, its market capitalisation would be ₹50,000 (1,000 shares x ₹50 per share).

As per SEBI’s rules, all companies on the stock exchanges are ranked according to their market cap. The companies are classified into three different categories – Large-Cap, Mid-Cap and Small-Cap. 

What Are Large-Cap Stocks?

Large-cap stocks are companies ranked 1 to 100 based on their market capitalisation. These are stocks of well-established companies that have a dominant market share. Based on the market cap, SEBI identifies 100 large-cap businesses and ranks them on the stock exchanges from 1 to 100. Many large-cap stocks pay regular dividends and are suitable for investors looking for passive income.

For example, as of November 6, 2023, Reliance Industries Ltd is ranked 1 based on its market cap, which makes it one of the largest companies by market cap.

Feature of Large-Cap Stocks

Consistency:

These companies are well-established and financially stable with an extensive supply chain network. They remain consistent during economic cycles.

Better analytics:

Large-cap firms have robust balance sheets and publish their financial details periodically. Investors can assess these reports to analyse investment decisions.

Transparency:

Large-cap companies are in the business for a longer time. Investors have more data available on their actions and financial activities.

Preferred by asset managers:

To balance risk exposure and improve returns, mutual fund managers prefer to invest in large-cap stocks. These stocks have higher liquidity and trade regularly on the bourses.

Income generation:

Many investors prefer large-cap stocks because they are relatively stable compared to mid and small-caps. Some large-cap companies pay regular dividends, creating passive income for investors.

Expensive:

Compared to mid-cap or small-cap stocks, large-cap stocks are costly because they are more discoverable and enjoy higher demands.

How To Evaluate Large-Cap Stocks?

The large-cap company category consists of various businesses, some of which have made it to large-cap from small-cap, while others have established themselves as large-cap from the beginning. But a common factor is that all these companies have remained in the industry for a long time and maintained trackable records. All these companies have:

• Visible competitive edge
• Strong brand recognition
• Proven leadership
• Performance record

Who Should Invest in Large-Cap Stocks?

Large-cap stocks can help investors add stability, diversification, and liquidity to their portfolios. You can choose these stocks if:

• If you have an investment horizon of 5 years or more and prefer low volatility.
• If volatile growth stocks dominate your investment portfolio, adding a few stable large-cap stocks can give some balance. 
• If you are a first-time investor. These stocks are easily discoverable, stable, and comparatively low-risk than mid-cap and small-cap shares. 
• If you want to earn a steady income from your investment, you can consider buying large-cap stocks that pay regular dividends.

Why Should You Invest in Large-Cap Stocks?

The following justifies the inclusion of large-cap stocks in your investment portfolio:

• Stability: Large-cap stocks are frequently linked with well-established, financially sound companies. Their large market position and track record help to provide greater stability than smaller competitors. This consistency may build confidence in investors, making large-cap companies a solid investment, especially during market downturns.
• A Consistent Income Flow: Large-cap stocks often provide a regular distribution of dividends. These established companies, consistently generating profits, are more likely to share their earnings with shareholders through dividends. For investors focused on income, large-cap stocks can serve as a dependable and predictable source of regular income, making them attractive to those incorporating dividends into their investment strategy.
• Information Accessibility: Analysts and financial media often cover large-cap firms extensively. Investors may choose from a wealth of information provided by this comprehensive coverage. Accessible and transparent data enables investors to do in-depth research and analysis before making investment decisions, leading to a more intelligent and well-considered investment plan.

Advantages and Drawbacks of Large-Cap Stocks

Alternative Options to Large-Cap Stocks

• Mid-Cap Stocks: Investing in mid-cap stocks involves companies with a market capitalisation between large and small caps. Mid-caps offer a balance between growth potential and risk, as they are often in the expansion phase. While riskier than large-caps, mid-caps can provide higher returns and growth opportunities.
• ETFs (Exchange-Traded Funds): ETFs are investment funds that track an index, commodity, or basket of assets. They offer diversification, low costs, and the flexibility of trading on the stock exchange. ETFs focus on various industries, themes, or asset classes, offering investors various options.
• Multibagger Stocks: Multibagger stocks are equities that have the capacity to generate considerable returns over a prolonged period. Investors often pursue these stocks because of strong fundamentals, growth potential, and the possibility of significant capital appreciation. However, they come with increased risk, and comprehensive research is crucial before considering their inclusion in a portfolio.
• Equity Funds: Equity mutual funds aggregate funds from numerous investors to invest in a varied stock portfolio. They can be actively or passively managed. Equity funds deliver diversification and professional management. They are suitable for investors seeking stock exposure without the direct management of their portfolios.

Conclusion:

Before picking any stock, understand your investment objective and risk appetite. Talk to your financial advisor and research well about each stock. For more investment topics, keep following Angel One’s website. If you plan to invest in large-cap stocks, open a Demat Account on Angel One for free and start exploring.

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