What are common advantages of investing in large cap stocks?

Investing, Stocks
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May 2018

Most investors understand the importance of diversification through asset allocation within a portfolio, which is meant to balance out the risk and reward trade-off between equity, debt and cash holdings. Under the equity or stock positions within a portfolio, however, investors have a wide array of investment options, each with different characteristics, advantages and disadvantages.

A large-cap stock investment, defined as the stock of a company with a market capitalization of $10 billion or more, is common among both growth and value investors as a portion of an overall asset allocation. Large-cap, or big-cap, stocks have unique advantages for investors, including stability in size and tenure, steady dividend payouts to shareholders and clarity in valuations.

Large-Cap Stability

The greatest advantage to adding large-cap stocks to an investment portfolio is the stability they can provide. Because large-cap companies are so large and have a well-established reputation with consumers, they are less likely to come across a business or economic circumstance that renders them insolvent or forces them to stop revenue-producing operations completely. Companies that are considered small- or mid-cap do not have the same level of stability, and therefore carry a greater degree of risk than large-cap investments.

Dividend Payouts

Another advantage to investing in large-cap companies is the potential for steady dividend payments. The stock prices for large-cap companies are not typically slated for high rates of growth over time because they are already well-established in the market. This can create a stagnant stock price and little-to-no capital appreciation for investors. However, despite the lack of rapid growth in terms of stock price, large-cap companies often pay dividends to compensate shareholders. These dividends can lead to impressive comprehensive returns for large-cap investors when they are added to the performance calculation over time. Large-cap stocks that pay steady dividends are common among income investors or those seeking income through relatively conservative investing.

Research and Valuation

Because large-cap companies often have a long business tenure, investors and creditors can easily obtain research on company operations and profitability levels. Publicly traded large-cap companies are required to provide shareholders and potential investors with accurate and periodic financial statements, allowing for ease in determining whether a company is worth the investment. In addition to research, company history and financial statements can be used in combination with current business activity to determine accurate valuation. These aspects play an important role in understanding the risk and potential reward of investing in a large-cap company.

Investors can use the Russell 1000 Index to find and evaluate large-cap companies, as this index compiles approximately 1,000 of the largest companies in terms of market capitalization operating within the United States. Large-cap investments can be purchased as individual shares of stock; through an exchange-traded fund (ETF) that tracks a large-cap benchmark; or through one of the hundreds of available mutual funds focused on large-cap investments.

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