The term cap is short for market capitalization. It is a parameter for quantifying the value of a company with the aid of the total number of prevailing shares multiplied by the price of each unit. Large cap stocks are hence shares that are issued by the company with a huge market cap.
According to this valuation, there are three basic types of capped entities: large, mid, and small. The following table illustrates 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 entities are listed at the top of recognized stock exchange indices across the globe. The Nifty 50 of India hosts the top fifty large cap stocks in India which are the most traded in the stock industry.
Some stocks in this section are also known as blue-chip stocks as in most scenarios the entities owning these stocks are leaders of their respective sector or are among the leading three figures in it. They have broad market recognition, financial soundness, and productivity. Hence, such stocks are the most sought after stocks in the industry.
Features of Large Cap Stocks
Let us now discuss some of the features of the large cap stocks.
Large-cap entities are well-established and have achieved financial maturity. Hence, their value of shares cannot appreciate as much as the values of small-cap stocks or mid-cap stocks. Returns on such stocks are primarily derived from the dividend component.
Large-cap entities have a robust financial framework, fortitude, and also soundness. Ergo, large cap stocks react mildly to market fluctuations. It prominently lowers the risk on such investments, as, unlike small-cap and mid-cap entities, they do not operate the risk of dissolution during the contraction of the market, and can still afford to continue their business functions.
Entities in large-cap stocks list have been in business for a long time. They possess a rich functional history accessible to the general public via various avenues, thus reposing trust. It can be availed by potential investors for analysis.
These stocks are, in most scenarios, more expensive in comparison to other investment options.
They are the most liquid investment choices in the market as of their widespread fame and readily available buyers.
Why Should You Make Investments In Large Cap Stocks?
Here are some reasons that will illustrate why you should make investments in large cap stocks.
Large-cap shares provide stability to your investment portfolio. It is largely unlikely that a large-cap company will be termed insolvent or inoperative by a bearish market or at the time of a prominent market crisis. Hence, it can, to some amount, balance any losses that have been suffered by you via other securities in your portfolio during a market slump.
A Regular Flow Of Income
The basic source of income from large-cap stocks is via dividends and not capital appreciation. Hence, even though it might not yield substantial capital profits upon sale or transfer of the same, you are promised regular dividends. This factor can compensate for the scarcity of periodical returns from other types of securities.
Availability Of Information
Unlike small-cap and mid-cap entities, large-cap entities in India are obligated to offer access to their financial statements and other required documents to the general public. Their profitability and functions thus offer a comprehensive portrayal of their performance in a large-cap stocks list. Such data is imperative for sound investment conduct. Hence, you can assess this data against your portfolio to see what best compliments it.
Disadvantages Of Large Cap Stocks
Now that you know the benefits of large cap shares, it is time for you to know what are the factors that should keep you away from large cap shares.
Low Capital Appreciation
One of the important drawbacks of large capital stocks is their restricted potential for capital appreciation. Due to their smooth response to market volatility, the stock values do not increase as much as mid-cap and small-cap stocks at the time of the bullish market.
Investments in large capitalization stocks in India need substantial capital; which is why individuals that have low disposable income cannot afford to invest in these types of stocks.
Currently, only a handful of large-cap entities exist in India after the latest SEBI categorization.
If you can hold an investment for at least five years or more, and you want stocks with relatively low fluctuations, then large cap stocks might be a good option for you. If your portfolio is filled by fluctuating growth stocks, then adding a few stable large capitals might be a smart shift to diversify your holdings without prominently sacrificing growth potential. Remember that while large-cap shares are often those of entities that “everybody knows,” it is still crucial to do your homework before you purchase.