What are Large Cap Stocks? Key Features, Advantages & Drawbacks

Thousands of stocks are listed on the Indian stock exchanges. And one popular criterion to distinguish these stocks is through market capitalisation. Based on market capitalisation or market cap, stocks can be divided into large-cap, mid-cap and small-cap. This article will explore the features, advantages, disadvantages and suitability of large-cap stocks.

What are Large Cap Stocks?

Large-cap stocks, as the name suggests, are shares of companies with a large market capitalisation. Market cap shows a company’s value and is calculated by multiplying the total existing shares by the price of each unit. 

The following table demonstrates the classification of stocks based on market capitalisation.

Large-cap stocks are the top 100 companies on the stock exchange. These companies are well-established and have a strong market share in the industries that they operate in. Large-cap stocks can influence the movement of the broader market as they hold a higher weightage in the overall market. India's stock market benchmark Nifty50 index holds shares of the top 50 large-cap companies and is widely tracked by investors. Currently, Reliance Industries (RIL) is the largest company in India in terms of market capitalisation.

Large-cap stocks are popular among investors as they have sound financials, and stable earnings and often pay regular dividends. They are also less volatile and risky than mid-cap and small-cap stocks, making them attractive for investors who seek stable returns and have a low-risk appetite. 

Features of Large Cap Stocks

Some of the key features of large-cap stocks include:

Low Risk: Large-cap stocks are more resilient to market fluctuations than their mid-cap and small-cap counterparts. This is because large-cap stocks have a healthy financial infrastructure. These companies are better equipped to face market downturns and do not run the risk of facing bankruptcy during difficult economic times. 

Moderate Returns: Large-cap stocks are well-established and have reached financial maturity. Therefore, their returns are more moderate than smaller companies. Plus, many large-cap stocks pay dividends, creating a passive income stream for investors. 

Expensive: Large-cap stocks are generally more expensive than mid-cap and small-cap stocks as they have a higher demand. 

Liquid: Large-cap stocks as mentioned earlier are popular among investors and find buyers readily, thus making them more liquid than other investments. 

Transparency: Large-cap stocks belong to companies that have been in the business for a long time. Investors have easier access to their financial history and data, which investors can use to analyse these stocks. 

Who Should Invest in Large Cap Stocks

Large-cap stocks provide stable returns to investors and are less volatile. They are suitable for investors who:

• Have a low-risk appetite and are seeking steady gains on their investments without much volatility
• Are investing in the market for the first time as these stocks are stable and have lower risk than mid-cap and small-cap stocks
• Have a long-term investment horizon
• Are looking to earn a steady income as large-cap stocks often pay regular dividends

Advantages of Investing in Large Cap Stocks

Adding large-cap stocks to your portfolio can provide you with the following benefits:

Stable Portfolio Returns: Large-cap stocks are of companies that are well-established and have sound financials. Large-cap stocks can provide stable returns as they don’t tend to fall sharply during market fluctuations. They are also better suited to weather economic downturns as large-cap companies rarely turn insolvent. 

Better Access to Information: Large-cap companies have generally been around for a long time and investors therefore have more data on their financials. Investors can use this information to do in-depth analysis and accordingly make well-informed investment decisions.

Regular Dividend Income: Large-cap companies often provide dividends to investors, resulting in a passive income stream. 

Disadvantages of Investing in Large Cap Stocks

While large-cap stocks have many advantages, there are also some drawbacks of investing in them:

Limited Growth Scope: Large-cap stocks have a limited scope of growing rapidly as compared to mid-cap and small-cap stocks. While these stocks are more resilient to market volatility, their ability to grow in a bullish market is slower. They have potentially lower returns due to lower risk.

Expensive: Investment in large-cap stocks requires substantial capital and investors with low disposable income may not be able to invest in them. 

Valuation Concerns: Some large-cap stocks may be overvalued due to strong buying interest in them, which can lead to price corrections. 

Alternate Investment Options to Large Cap Stocks

Here are some alternative investment options to large-cap stocks:

Exchange-traded Funds: ETFs or exchange-traded funds track a specific index, commodity or basket of assets and can be traded on an exchange. Investors can buy and sell ETFs during trading hours and they provide benefits like low costs and diversification.

Equity Funds: Equity mutual funds have pooled investments that are used to purchase different stocks. These are professionally managed and are suitable for investors seeking exposure to stocks but have a lower risk appetite as equity mutual funds invest in a diverse group of stocks.  

Mid-cap Stocks: Mid-caps are more volatile and riskier than large-caps but can provide high returns and growth as these companies are still in the expansion phase.

Conclusion

Large-cap stocks are shares of companies that are well-established and are backed by robust financials. They can provide stable returns, consistent dividends, and are less prone to market fluctuations.

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