Large Cap Stocks

Features of Large Cap Stocks

Large-cap stocks that represent large market caps are known for liquidity and stable returns in the stock market. They are usually less risky, giving investors a sense of safety and a chance for steady returns.

Let's explore the key features of large-cap companies.

Market Capitalization and Size

Large-cap companies are defined by their huge market cap, which is typically above ₹20,000 crore. Large size indicates market share, wide market recognition, and a well-established position for the companies. Market cap allows you to compare the company across different sectors based on overall market value. 

Stability and Financial Strength

Large companies are financially stable and often possess strong cash flows, reserves, and a history of good revenue and profit generation. These companies also have access to a large amount of capital through bonds and equity financing to expand operations within India and globally, and are most likely to pay dividends to their shareholders, which becomes a source of income for their investors.

Liquidity

Large-cap stocks are highly liquid, meaning they are frequently traded on stock exchanges, making it easy to buy or sell shares. This high liquidity is the reason for stock price stability, which further reduces the risk of price fluctuations. High liquidity also leads to low bid-ask spreads, which results in low transaction costs.

Long-Term Growth Potential

Companies with a high market capitalization have proven business models, stable cash flows, and a loyal customer base, which makes the company reliable for future growth, often leading their respective industries. These companies are also favoured by foreign investors and institutional investors, including pension funds, mutual funds, and insurance companies.

Transparency and Public Information

Large-cap companies in India are generally more transparent than smaller companies, providing access to financial reports, their performance, and operations. This gives investors a sense of trust towards the company as a shareholder.

Benefits of Investing in Large Cap Stocks

Investing in large companies can benefit the investment portfolio in terms of long-term investment returns, pays dividends regularly, and offers several other benefits.

Dividend Income

Large companies earn high revenues and make good profits. A part of these profits is reinvested back into the business, known as retained earnings, while another part is paid out as dividends to shareholders, which usually attracts investors and acts as a source of income for them. 

Long-Term Investments

Large-cap companies have delivered an average annual return of around 11% CAGR in the last 10 years, excluding dividends. The consistent profits make them a reliable option for long-term investment. Many people begin their investment journey with mutual funds, which often focus on large-cap stocks to offer steady, moderate returns over the long term.

Lower Risks

Large companies have strong cash flows and cash reserves, which help them stay stable even in tough times like the COVID-19 pandemic, but small-cap companies often do not have running cash flows, which makes them risky in unexpected downturns of the markets.

Disadvantages of Large Cap Stocks

There could be several drawbacks for investors to investing in large-cap stocks. Let's understand this in detail.

Limited Growth Scope 

Large-cap stocks have a limited scope of growing rapid as compared to mid-cap and small-cap companies. 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, sometimes low capital appreciation compared to growth spurts in smaller stocks.

Expensive

The stock price of a single share of some large-cap companies can be high, which might seem like a barrier for investors with limited capital wanting to buy individual stocks directly. However, routes like mutual funds or ETFs allow investment with smaller amounts.

Dividend Cuts During Economic Downturns

Generally, large companies are attracted because of their regular dividends, but they also get affected in economic downturns or prolonged market slumps, which is because of reduced earnings during these times.

Alternative Options to Large Cap Stocks

Exchange-Traded Funds 

ETFs are designed to give returns that closely match the performance of an index. For example, a Nifty 50 ETF in India tracks the Nifty 50 index and allows investors to get similar returns to the index, without directly buying all the stocks in it. This is a convenient and cost-effective way, because ETFs generally have low management fees of ~0.1–0.5% compared to if actively managed mutual fund, which has fees of ~1.5–2%.

Mid-Cap Stocks 

Mid-cap stocks have delivered better returns than large-cap stocks in recent years. Although they are more volatile and may not offer regular dividends, they have strong potential for capital growth. These are often from developing industries. 

Equity Funds

Equity funds, also known as stock funds, are investment funds that primarily invest in the stocks of companies. They pool money from multiple investors to buy a diversified investment portfolio of stocks, aiming to generate returns for the investors.