Large Cap - Big Cap

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What does 'Large Cap - Big Cap' mean

Large cap (sometimes "big cap") refers to a company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term "large market capitalization." Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. A company’s stock is generally classified as large cap, mid cap or small cap.

BREAKING DOWN 'Large Cap - Big Cap'

Large cap stocks represent 91% of the total U.S. equities market as measured by the Wilshire 5000 Total Market Index. As of September 30, 2017, the Index had 3,503 stocks representing the entire U.S. equity market universe.

As of October 24, 2017, the top U.S. stocks by market cap included the following:

  1. Apple
  2. Alphabet
  3. Microsoft

Globally large cap companies are usually found in the market’s leading benchmark indexes. In the U.S. these indexes include the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite.

Since large cap stocks represent the majority of the U.S. equity market, they are often looked to as core portfolio investments. Characteristics often associated with large cap stocks include the following:

1. Transparent: Large cap companies are typically transparent, making it easy for investors to find and analyze public information about them.

2. Dividend payers: Large cap, stable, established companies are often the companies investors choose for dividend income distributions. Their mature market establishment has allowed them to establish and commit to high dividend payout ratios.

3. Stable and impactful: Large cap stocks are typically blue chip companies at peak business cycle phases, generating established and stable revenue and earnings. They tend to move with the market economy because of their size. They are also market leaders. They produce innovative solutions often with global market operations, and market news about these companies is typically impactful to the broad market overall.

Market Capitalization

Market capitalization describes the market size of a company. Market capitalization is an equity market segregation used broadly in the investment industry. A company’s market capitalization is an important characteristic considered by investment companies and individual investors. Market capitalization is one characteristic of a company used in investment analysis. Market capitalization is usually used in conjunction with other stock characteristics such as price to earnings and earnings growth estimates. It is also an indicator of a company's market depth.

Market capitalization is calculated by multiplying the number of shares outstanding by the share price of the company's stock. The number of shares outstanding is reported on a quarterly basis, but the price of the stock can change from minute to minute. Therefore, the market capitalization value is actively changing with the market price. For example, a company with 10 billion shares outstanding, trading at a price of $10 per share has a market capitalization of $100 billion. Likewise, a company with 100 billion shares outstanding, and trading at a price of $1, also has a market capitalization of $100 billion.

Publicly traded stock issuance is used as a capital raising mechanism for publicly traded companies. When a company chooses to offer its shares for trading on the open public market, it typically uses share issuance as its primary equity capital raising tool. Thus, equity share management is a primary function used by well established companies for capital and shares outstanding are a part of that management process.

Market Capitalization Categories

In general, stocks are lumped into three main categories of capitalization: large cap, mid cap and small cap. However, mega cap and micro cap stock segregation may also be used. Mega cap refers to stocks with a market cap of greater than $100 billion. Micro cap is less than $300 million and nano cap may also be used for less than $50 million.

A large-cap company has a market capitalization of over $10 billion. A mid-cap company has a market capitalization between $2 billion and $10 billion, and a small-cap company has less than $2 billion in market capitalization. Large cap companies usually have broader market issuance experience with greater access to the capital markets. In general, large caps usually have the greatest trading liquidity.

Investing in Large Cap Stocks

Investors like to diversify their portfolios by investing in companies in different industries with varying market caps, revenues and earnings growth projections. Due to their size, large-cap stocks are generally believed to be safer. While they do not offer the same growth opportunities as emerging mid-cap and small-cap companies, large cap companies are innovative market leaders and their stock price can gain significantly through specific market initiatives or around groundbreaking market solutions.

Generally, large cap companies are typically used as core long-term investments in an investment portfolio because of their stability and dividends. Financial advisors suggest diversifying an investment portfolio by including small-cap, mid-cap and large-cap stocks. Allocations and investment decisions are typically based on risk tolerance and investment horizons. (See also Financial Advisor Insights and common advantages for investing in large cap.)