Investing > Complete Guide to Large-Cap Stocks

Complete Guide to Large-Cap Stocks

Large-cap stocks have many benefits and could serve as a pillar of your investing strategy.

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Updated January 08, 2022

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In your view, what does the ideal stock look like?

The words ‘safe’ and ‘profitable’ come to my mind.

In fact, there’s a whole category of stocks that fit this description, and many of them are called large-caps stocks. These are the stocks of huge companies that are very unlikely to fail due to their size, and yet, are big for a reason—they grow. 🌱

However, just tossing all your cash into these stocks might not be the best way to invest. For one, these bad boys don’t come cheap—and some don’t even grow very quickly.

Large-caps are the stocks from the largest companies on the market: Apple, Microsoft, Google, and so on—you probably won’t go wrong investing in these. But the million dollar question is: How do you pick out the ones that are profitable, safe, and have potential to grow?

With the market recovering at record-breaking speeds, it may be overwhelming to find the right investment. The ten largest capitalization stocks alone are worth more than $8 trillion dollars—these companies are so unimaginably huge that knowing everything that they are doing is seemingly impossible. 

In this article, we will teach you everything you need to know about investing in large-cap stocks, what to look for when analyzing them, and how to maximize your gains while hedging your risks.

What you’ll learn
  • What are Large-Cap Stocks?
  • Pros and Cons
  • Choosing Large-Cap Stocks
  • When to Exercise Caution
  • Examples of Large-Cap Stocks
  • Large-Cap Stocks as an Asset Class
  • Large-Cap Stocks in a Recession
  • Investing in Large-Cap Stocks
  • Large-Cap Stock Alternatives
  • Conclusion

What are Large-Cap Stocks? 🔎

Understanding large-cap stocks starts with figuring out market capitalization. This is how we determine what is and what isn’t large-cap.

Market capitalization is the number of shares outstanding multiplied by the current share price. This accounts for the total value of all the shares publicly available for trade on the market. This means that a private stake in a company isn’t typically involved in calculating the market cap.

Because capitalization is tied up in the share price of a company, the valuation will constantly be changing. But even with the changes a large-cap stock isn’t typically going to shift into a mid-cap stock overnight.

Large-cap stocks are those companies where the share value has risen to the extent that the company is worth at least $10 billion. These are some of the largest companies on the planet. There are several different categories for capitalization, and each of them has characteristics that help us better understand the assets.

Type of CompanyMarket CapCharacteristics
Micro-cap<$300 millionMicro-cap stocks are very small companies, they may even be too small to list on major exchanges and are sold as OTC stocks. These companies are riskier than small-cap stocks.
Small-cap$300 million - $2 billionSmall-cap stocks are less insulated from business difficulties and therefore riskier investments. If something goes wrong with the business, or the economy at large, small-cap stocks have fewer resources to outlast the event.
Mid-cap$2 billion - $10 billionMid-cap stocks are companies in the process of growing. During the mid-cap stage of a lifecycle, we will see if a company will explode or fail.
Large-cap$10 billion - $200 billionLarge-cap stocks are quality companies with a history of growth. These companies often have a history of paying and maintaining dividends.
Mega-cap> $200 billionSimilar to large-cap stocks. These are reliable companies that have grown in value beyond large-cap stocks.

Should You Buy Large-Cap Stocks? 💡

Large-cap stocks can be a good idea for investors to hold in their portfolios because it brings consistency and growth. Because large-cap stocks are so massive they are going to have a more predictable future.

These kinds of companies are better insulated from downturns in their business and the economy at large. They will likely be able to withstand lawsuits and losses of revenue. The big downside of buying large-cap stocks is that you are giving up the potential for the explosive but uncertain growth that small-cap and value stocks can provide.

Stories of massive growth from small investments can sound alluring, and because they can happen, you may be tempted to invest exclusively in small companies. For example, in 2010 Tesla was a new company with relatively low valuation and you could pick up shares for around $5-10. It took a few years, but the stock exploded into one of the largest companies in the world. If your portfolio is entirely large-cap stocks, it’s not likely you will see an investment explode in the same way.

But not all businesses are going to be a TSLA. Over the past year, over 200,000 businesses failed in the US.—but not many of these were large-caps. Indeed, large-cap stocks make your portfolio safer by reducing the risk of failure.

The Good and the Bad with Large-Cap Stocks 👍👎

Pros

  • You will see consistent growth. Many large-cap companies are here for a reason.
  • Large-cap stocks will usually have reliable dividends.
  • Large-cap stocks outperform the market in years of growth.

Cons

  • Growth is restricted because the companies have already undergone their most explosive growth periods.
  • Large-cap companies won’t be able to adapt as quickly as small companies with tighter management structures.
  • Stocks can stagnate, leaving investors with nothing to show for their risk but the dividends they receive.

How to Pick the Best Large-Cap Stocks ✅

The best large-cap stocks are the companies that show signs of continued growth, have strong dividends, and are producing products that you are confident in. The largest companies in the world are those that are able to provide valuable services to their customers and that have histories of strong growth.

The largest companies on the stock market are bound to change from time to time, but the top ten on the market right now have a lot of good things going for them. Many investors may own shares of these companies without even realizing it because many 401k and retirement plans use them to guarantee growth.

StockMarket CapShare Price
AAPL $ 1,927,600,000,000$132
MSFT $ 1,778,200,000,000 $255
AMZN$ 1,324,400,000,000 $3,372
FB$ 708,500,000,000$312
GOOG $ 596,300,000,000$2,285
TSLA$ 512,900,000,000$677
BRK.B$ 487,100,000,000$266
JPM$ 464,500,000,000$156
JNJ$ 432,000,000,000$161

Finding the right large-cap stock can be a struggle. It will take some fundamental analysis to compare the largest companies against each other. Looking at two companies like JP Morgan and Berkshire Hathaway, we can see the massive difference in returns when looking over the course of the past five years.

While JP Morgan has returned over 120% profits in this time period, BRK-B has only seen gains of 86%. While researching a stock may help you find the right company, many investors simply use index funds to minimize their risk. Some of these funds perform very well. VLACX has shown gains as high as 32% in its best years.

Large-Cap Stocks
BRK-B (blue) and JPM (orange) compared over a 5-year period. Image by TradingView.

If you want to pick for yourself, you should focus on the factors that you can understand. Here are a few signs you can look for to find a strong company that will endure the elements.

Pick a Company That Can Grow 🌾

When looking at different large-cap companies, you will want to try to find a company that has the best chance of growth. Warren Buffet himself has said he does not see Berkshire outcompeting the S&P 500 over the next several years. On the other hand, through its innovation and expansion to fintech products, JP Morgan has risen in share price by more than 278% year over year in 2021.

Look at the Dividends 💸

Dividends can be a good metric for understanding the health of a business. While excessive dividend payments can mean that companies are forgoing reinvestment in their own company, companies that aren’t paying dividends may have more volatile share prices.

On top of the lower volatility, dividends are a good signifier of a healthy company. For instance, blue-chip companies and dividend aristocrats are so popular because investors can count on the businesses to continue to operate despite what is going on in the world.

Remember, dividends are not always a precursor to a large-cap stock. Neither Tesla nor Amazon have paid a dividend to date.

Unlike skipping on your rent payment, companies skipping dividend payments can actually be a good thing. By not paying dividends, companies have more money available to reinvest in the business and build a company.

Innovation ⚙️

The ETF ARKK looks at companies that are producing disruptive products and recently raked in over a billion dollars by speculating on space companies. Innovation is key for growth in many businesses and it can be the key to finding profitable companies.

Naturally, Tesla is the most prominent example of this. The company’s high stock price is not due to its earnings being great—rather, it’s because they come out with mind-blowing innovations every year that make investors think: “Yeah, this company will revolutionize the industry. I better invest now before the stock explodes.”

When Not to Buy a Large-Cap Stock ⚠️

Buying large-cap stocks isn’t entirely without its problems—you will not become a millionaire by sinking your into paycheck willy-nilly. When you are analyzing the fundamentals of a company, looking at their dividends, balance sheet, and debt-to-equity ratio, you should be trying to understand if the company you are buying is going to stick around.

Cyclical Companies 🔄

Unfortunately, some companies might be large-cap stocks only temporarily and they will cycle back into a smaller company as their business and the overall economy retracts. This happens from time to time, and that’s why you need to be sure a company is robust.

Dividend Yield Traps 🧀 🐁

Investors should be wary of large-cap stocks that have red flags. When choosing a company to invest in, watch out for dividend yield traps. These occur when one company in an industry pays a significantly higher dividend than its competitors.

Paying a high dividend is attractive and can get your stock price inflated, but a high dividend comes with the downside of not being able to reinvest as much capital in your company. Watch out for these assets.

High Debt 💳

Another thing to avoid is companies with lots of debt. Debt can hinder the long-term growth of a corporation by tying up cash flow in debt payments. This chokes progress and can lead to your returns being less than average.

On the other hand, some debt is healthy. It is normal to see companies to take on debt to more aggressively and efficiently expand their business. You will need to learn to evaluate how much debt is good for a company.

Bad Management 👨‍⚖️

Warren Buffett famously said that the wrong company can be taken apart by a few idiots at the top, and that a good company is one “your idiot nephew could run.” If you picked a company that wasn’t robust enough to withstand a couple of dummies you may lose your investment.

Popular Large-Cap Stock Examples 👇

The most popular stocks amongst investors will change from time to time. If you are serious about learning how to trade stocks, buying popular stocks can lead to more opportunities for profit.

Gilead Sciences (GILD): 5-Year Change -35% 📉

Gilead Sciences has grown in popularity and has appeared in the news due to their profitability during the COVID pandemic. Their cell therapy helps drive profits during the fourth quarter. The company’s growth is largely dependent on treatment for HIV and Hepatitis. 

Tesla (TSLA): 5-Year Change +1714% 📈

Tesla is a massively popular stock amongst investors who believe the electric car manufacturer is disrupting the market. The company recently made headlines by potentially allowing consumers to buy their cars with bitcoin.

Starbucks (SBUX): 5-Year Change +138% 📈

Starbucks is a popular company that recovered well from the COVID pandemic and has shown strong growth as it has opened in more and more markets across the world. Starbucks’ success in the fast-food sector has brought many investors success. Their growth will depend on new markets.

General Electric (GE): 5-Year Change +45% 📈

General Electric was one of the United States most iconic companies and it defined corporate culture for years. After a bad fall in price in 2008 and a few bad business deals, the company’s price has suffered immensely. But GE is still worth over $100 billion and many investors are optimistic for the stock’s future.

Alibaba (BABA): 5-Year Change +162% 📈

Alibaba is one of the largest commerce sites in the world. It is based in China and has seen massive growth over the past few years due to increased online shopping. The commerce giant has markets to tap into to drive future growth, but their progress may be deterred by government regulation.

Five large-cap stocks
Five large-cap stocks compared over a 5-year period. Image by TradingView.

Large-Cap Stocks as an Asset Class 🏛

Large-cap stocks can compose a varying amount of your portfolio. How much you put into these stocks will depend largely on your risk tolerance and how comfortable you are with swings in your account value.

While it’s important to remember that while some large-cap stocks may limit the growth of your account, some large-cap stocks such as Amazon or Google are operating in industries with a high potential for growth. No one is sure what the future will look like for some of these industries.

All in all, it can be said that large-cap stocks are very versatile. Choosing a portfolio of stable, steady stocks like Berkshire Hathaway will yield tremendously different results to choosing a portfolio of tech giants like AAPL and GOOG.

How Do Large-Cap Stocks Perform During a Recession? 📉

Large-cap stocks tend to be better insulated at the beginning of a recession because consumer confidence is high with these companies due to their long history of returns and their available capital. On the other hand, when it comes to the recovery stage of any recession, we will typically see small to medium cap businesses outperform large-cap companies.

This is because the small companies were able to weather the storm and take advantage of their reduced competition when economies come back to life. When a recession nears its end,  consumer spending grows, putting small-cap stocks in an excellent position for profit.

With all that in mind, it’s important to consider that different recession affects different industries. It may be the case that the large-cap company you are confident in will be disproportionately affected by market downturns.

How to Invest in Large-Cap Stocks 🚀

Investing in large-cap stocks can be as simple or complex as you want it to be. You can invest easily with an index fund through a top stock brokerage, or you can even have a robot do it for you.

Investing in large-cap stocks can be a great way to easily grow your portfolio and insulate yourself from loss, and the investment service you use should help you by making the process easy. With the right brokerage, buying the stocks can be as simple as funding your account, seeking out the ticker symbol you are interested in, and placing the buy order.

Here are a few regulated brokers, trusted by a large number of investors:

Fees
Minimum initial deposit

$0

TS Select: $2,000

TS GO: $0

Commissions

Vary

$0

Account minimum

$0

$0

General
Highlight

Huge discounts for high-volume trading

Powerful tools for professionals

Best for

Active traders

Active options and penny stock trading

Promotion
Rating
Fees
Minimum initial deposit

TS Select: $2,000

TS GO: $0

$0

Commissions

$0

$0

Account minimum

$0

$0

General
Highlight

Powerful tools for professionals

Pioneer of commission-free stock trading

Best for

Active options and penny stock trading

DIY stock trading

Promotion

Free stock

Rating
Fees

Minimum initial deposit

$0

TS Select: $2,000

TS GO: $0

$0

Commissions

Vary

$0

$0

Account minimum

$0

$0

$0

General

Highlight

Huge discounts for high-volume trading

Powerful tools for professionals

Pioneer of commission-free stock trading

Best for

Active traders

Active options and penny stock trading

DIY stock trading

Promotion

Free stock

Should You Invest in Large-Cap Funds? ❓

Investment funds are a way in which investors can easily diversify their portfolio without having to individually pick out companies. Popular large-cap ETFs are a good place to start investing because they offer solid returns, even if some of them are slightly below average.

Large-Cap Exchange Traded Funds

FundDescription5-Year Growth
MGKThe Vanguard Mega-Cap Growth ETF follows the largest companies in the world.179%
SCHGThe Schwab US Large-Cap Growth ETF matches the largest companies on the Dow Jones Industrial.160%
SDYThe SPDR S&P Dividend ETF tracks dividend aristocrats on the S&P 500.48%

Picking the right fund is essential to seeing significant returns. Over the past five years, investing in the S&P 500 with an ETF would have netted investors close to 97% returns. If you had invested solely in the SPY ETF, you would have two times the value of an account that invested exclusively in SDY.

But picking the right fund will involve other metrics. There are costs associated with putting your money in an ETF that you may not be aware of.

Expense Ratios ➗

If you invest in an index fund you will have to pay a fee. In the industry this is called an expense ratio. 

An expense ratio is the percentage fee that you pay the company that runs an index fund—the percentage is calculated based on the amount of money you have in your account. For example, a $10,000 account being charged 0.03% would have to pay $3 a year to invest in that particular fund. While you may be able to withstand the financial blow of a $3 charge, expense ratios can add up over time.

Index funds are great for investors who don’t wish or don’t have the time to do individual research. They do have their drawbacks though. One issue is that with a well-diversified portfolio, you are potentially going to invest in bad companies or corporations that don’t fit into your strategy.

But while this might mean you lose out on some gains, your fund will be balanced by holding other corporations. This limits your risk overall.

Large-Cap Stock Alternatives 💱

Buying large-cap stocks is not essential, and you can build a perfectly fine portfolio with these assets. You may be interested in trying your luck with small and mid-cap stocks. Alternative strategies might even be your only shot at beating the market that is expected to slow down in the future.

This image illustrates the differences between large cap and small cap stocks.
Small- and large-cap stocks have key differences—that’s why combining the two in your portfolio can be very beneficial.

Branching out into other assets like forex trading can even be worthwhile. Whatever your strategy, investors have to decide what their risk level is and how to adapt to the market.

Bottom Line: Are Large-Cap Stocks for You?

Large-cap stocks are a major part of many investors’ portfolios. These are massive assets that move the whole economy and drive business, so buying them will keep you in the same club as everyone else. They can be great investments for their consistent returns, increasing dividends, and long-term stability.

All of this comes with the potential sacrifice of explosive growth. Large-cap stocks aren’t likely to make you rich overnight, but they can make you rich over a few decades.

Investors can decide if large-cap stocks are right for them by figuring out their risk tolerance and how much time they have to invest before they’ll need the cash. There are so many assets to choose from, you should pick the ones you believe in.

Large-Cap Stocks FAQs

  • Are Large-Cap Stocks Safe?

    Large-cap stocks are typically safer than medium and small-cap companies because they have the resources to withstand changes in the business. However, there is no investment that is completely without risk. Large companies can still go out of business and you can lose your investment.

  • How Do You Day Trade Large-Cap Stocks?

    Day Trading large-cap stocks is similar to trading any other stock. You will use volatility to buy and sell the asset when you can make a profit. Understanding technical analysis, trends, and pattern trading are key to making a profit.

  • Is Apple a Large-Cap Stock?

    Apple is a large-cap stock. In fact, it is the largest publicly listed company in the world. The tech giant has been driven to such high valuation by massive popularity and large profit margins.

  • Are Large-Cap Stocks High Risk?

    Large-cap stocks present more risk than investing in bonds, but they are less risky than investing in small-cap stocks. Large-cap stocks can be risky if your portfolio is poorly diversified.

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