Have you also felt jealous when your investor friends brag about holding shares of premium firms with large market capitalisation?
Do you want to go ahead and invest in large-cap companies but are unsure about what you are getting yourself into?
Well…
High five. Because you are at the right place.
As we have got you covered.
This article covers the basics of Large Cap Stocks to help you understand the fundamentals of the concept, thereby aiding your well-informed decisions for your investment options.
So, let us start with the basics first. Read on to know the definition of Large Cap Stock.
On average, large-cap corporations have a good track record and are an excellent alternative if you would like to invest in a company’s stock with less risk comparatively. Long-term investors should choose them because of their considerable market position and consistent high performance.
The depth of a company’s market is measured by its market capitalisation; therefore, to calculate the market capitalisation value of a company, multiply the number of outstanding shares by the stock’s share price.
Some Large Cap Stocks in India are from the market companies listed on Indian stock exchanges like Reliance Industries and Infosys.
However, a more formal Large Cap Stocks definition is necessary for the clarity of the concept. So, let us understand what does Large Cap Stocks means.
According to SEBI criteria, all companies listed on stock exchanges are ranked based on their market capitalisation. Large-cap firms are the top 100 companies globally and are defined as those with a market valuation of $10 billion or more.
Large-cap companies are more mature, and as a result, they are less volatile during bear markets as investors seek safety and become more risk-averse compared to mid-cap and small-cap equities.
The features of Large Cap Stocks are diversified, and some of them are listed below. The attributes of Large Cap Stocks are as follows:
An average and consistent return are expected out of large-capitalisation companies as they are well-established and have reached financial maturity. As a result, the value of their shares cannot rise as rapidly compared to that of mid-cap and small-cap stocks. The dividend component is the primary source of return on such stocks and contributes significantly to the returns on these stocks.
Large-cap corporations have a robust financial infrastructure, enabling them to withstand market fluctuations and reduce risk. Due to this, Large Cap Stocks normally react reasonably to market volatility.
Unlike mid-cap and small-cap companies, it considerably reduces the risk of such investments because they are not at risk of experiencing bankruptcy during a market crisis and can continue their operations.
Companies on the Large Cap Stocks list have a deep operational history and success. In numerous ways, the general public can access their extensive track records, allowing them to be trusted.
Potential investors can track the stock’s performance over time and see how it has coped in various market circumstances.
In comparison to other stocks, large capitalisation stocks are slightly more expensive, as these stocks have proven track records, strong financials, and are stable investment options.
Hence, making them costlier in the market.
The most popular stocks in the market are Large Cap Stocks, and this is because of their enormous popularity and readily available purchasers. They are the most liquid investment choices on the market. This, in turn, makes them more fluid, as there are more buyers and sellers.
There are some significant drawbacks of Large Cap Stocks, and they are as follows:
One of the significant disadvantages of Large Cap Stocks is their limited potential for capital appreciation.
During a bull market, stock values do not rise as much as mid-cap and small-cap stocks due to their mild reaction to market fluctuations.
Individuals with low disposable income cannot afford to invest in Large Cap Stocks in India because they require significant capital. Hence, it turns out to be costly for beginners and small investors.
India has only a few large-cap companies following the recent SEBI categorisation, which does not leave many options for investors. Hence, most investors have difficulty choosing a large-cap company according to their preferences and investment choices.
There are some benefits that an investor reaps while having Large Cap Stocks in their portfolio. Such benefits are as follows:
Large Cap stocks are highly consistent and provide stability to your investment portfolio. It is improbable that a company with a large market capitalisation will experience bankruptcy or lack of operations during a market crisis.
Large-cap companies are doubtful to go inoperative in a bearish market. Hence, having Large Cap Stocks in your portfolio can balance your losses suffered through other securities during a market slump.
When an investor buys Large Cap Stocks, they know that the primary source of income will be dividends and not capital appreciation. Hence, investors cannot expect substantial capital gains on the sale and transfer of Large Cap Stocks, but they can expect regular dividends.
The lack of regular returns from other types of securities makes large cap stocks a much better investment option.
Large-cap companies in India are bound to provide their financial statements and other vital documents for availability in the public eye. However, mid-cap and small-cap companies are not obligated to do so. This information allows investors to access their profitability and operations performance in the Large Cap Stocks list.
It also provides a holistic picture of the company’s position to the investors. Such information will always be available to provide transparency and regulated investment conduct for the investors. It also helps the investor to assess the financial position of a company and understand if it is a fit for their portfolio or not.
These stocks enhance your investment portfolio, thereby easing the investment process.
If an investor is unsure about investing in Large Cap Stocks, then given below are a few substitute investment options that they can consider. The other investment options are as follows:
The mid-cap stocks are expected to perform better than Large Cap Stocks in terms of capital appreciation. The performance of midcap stocks has been improving significantly in the past few years.
These stocks are comparatively less safe than the Large Cap Stocks and do not come with the promise of steady payouts in the form of regular dividends. But, these companies have immense potential for capital appreciation. Hence, it is suitable for investors who want capital gains.
Exchange-traded funds (ETFs) are a category of mutual funds purchased and sold on recognised Stock Exchanges. These exchange-traded funds include shares, debentures, treasury bills, bonds, and other fixed-income securities.
ETFs are a desirable option for investors who have just begun their investment journey because of their low cost and tax efficiency, along with other characteristics of stocks.
Equity funds are a category of mutual funds in which equity shares or stocks are purchased with the help of pooled investment. Experts manage these funds; hence the risk factor is substantially reduced, but the returns are similar to that of equity returns.
A stock that provides a diversified return on the capital employed is termed a multi-bagger.
These stocks have a low cost and give a substantial return on the investment amount.
The returns are said to be multiples of the investment amount; hence, they are named multi-bagger. For example – if the investment returns are three times the investment amount, it is called a triple bagger.
Investors who are new to the market should consult a market professional or get registered on an investment platform to understand the market dynamics and make well-informed decisions.
An investor should always examine the objectives and affordability of the investment before considering their investment options.
We have already explained the characteristics of Large Cap Stocks in the article. However, here are some things that investors can keep in mind before they decide to invest in Large Cap Stocks.
Most Indian companies have a substantial market capitalisation and a track record that suggests consistent growth and an upward trajectory in the profit margins. Such companies are mostly free from debt, but a low, stable equity ratio is acceptable.
Large Cap Stocks are mainly famous for their dividend payouts, and this steady dividend income allows investors to generate a regular passive income. Large-cap companies get regular dividends to compensate for their stagnant market price, indicating a stock’s lack of capital appreciation possibilities.
The mandatory criteria for a large-cap company is a high return ratio, including return on equity and return on capital employed. It should also have a high-interest coverage ratio, cash flow consistency, and other valuable metrics.
Let us understand how Large Cap Stocks differ from mid-cap stocks with the help of an all-encompassing comparison chart.
Serial No. | Basis | Large Cap Stocks | Mid Cap Stocks |
1 | Definition | Large Cap Stocks are the stocks of companies that have a large market capitalisation. | Midcap stocks are the stocks of companies that have an average market capitalisation that is neither small nor large. |
2 | Risk appetite for investors | The large-cap funds are comparatively safe than mid-cap funds. Hence, investors who are not willing to take a risk and are just looking for steady dividend payouts should invest in large-cap funds. | The mid-cap funds are riskier than large-cap funds but safer than small-cap funds. Hence, investors that are willing to take considerable but not significant risk can invest in midcap funds. |
3 | Liquidity | Large-cap funds are highly liquid because they give steady returns and belong to companies that have had an impeccable track record and stable financial position. | Midcap funds are less liquid than Large Cap Stocks but more liquid than small-cap stocks. Hence, one can conclude that mid-cap stocks have moderate liquidity. |
4 | Volatility | The Large Cap Stocks are less volatile as they belong to robust companies with high market capitalisation. | The mid-cap stocks are moderately volatile, given their belonging to companies with average market capitalisation. |
5 | Returns | Large Cap Stocks offer consistent returns in the form of steady dividend payouts.
The average return generated from these stocks has been around 5%-8% in the past five years. |
The mid-cap stocks offer capital appreciation and return higher than Large Cap Stocks but lower than small-cap stocks.
These stocks have been recorded to provide a return of 9%-12% in the last five years. |
6 | Dividend payouts | The Large Cap Stocks give a regular dividend payout. | Mid-cap stocks are not obliged to give regular dividend payouts. |
7 | Capital appreciation | Large Cap Stocks do not show capital appreciation because their stock value is mostly saturated at a highly significant value. | Mid-cap stocks have a high potential for capital appreciation and can help an investor book substantial capital gains. |
8 | Types of Investors | Investors who are not looking for riskier investments and are inclined toward a conservative approach can invest in large-cap funds.
Large-cap funds do not give quick money or aggressive returns, so if an investor is looking for long-term and stable returns, they should invest in large-cap funds. |
Midcap funds are slightly riskier than large-cap funds but are perfect for investors who have a moderate risk appetite and are looking for long-term investments. |
9 | Growth | Large-cap companies signify stable returns and consistent growth. | Mid-cap companies have great potential for growth. |
Below is a list of companies with a significant market capitalisation that provide Large Cap Stocks. Hence, a few companies that offer Large Cap Stocks are as follows:
ITC Ltd. is a company that has a dominant presence in the Indian cigarette market along with a substantial business that operates in other sectors like printing and packaging, branded packaged food, personal care products, and various other FMCG products.
As of March 31, 2021, the company’s liquidity is estimated to be above INR 33,000 crores.
Hindustan Unilever Limited (HUL) is one of the biggest FMCG companies in India. The establishment of Hindustan Unilever Ltd. in India has been in place for more than 80 years.
As of March 31, 2021, the company’s liquidity happens to be INR 4321 crores.
Tata Consultancy Services (TCS) Ltd. is an IT giant in India known for enabling IT services in the outsourcing segment.
The company has a robust financial portfolio with solid liquidity and free cash reserves.
As of March 31, 2021, the company’s liquidity happens to be INR 5,992 crores.
Reliance industries are the representative company of the Reliance group, the largest private-sector enterprise in India.
The company’s choice is a strong market position with stable cash flows and strong liquidity.
Development Finance Corporation Limited (HDFC) is a front runner in the housing finance industry in India with a distribution network of 651 outlets.
The loan portfolio of HDFC was INR 6,189 billion as of December 31, 2021.
In a nutshell, we can say that Large Cap Stocks belong to companies with a robust financial background and large market capitalisation. These stocks are perfect for conservative investors with a low-risk appetite. These types of stocks do not provide capital appreciation because their market value is already at a substantially higher position making the growth stagnant.
The growth is stagnant because of the saturated market capitalisation. So, further, a development would require significant innovative shifts in policy making. Selection of perfect policy is a time-consuming process with its own share of risk. Hence, instead of losing money to a risky approach, such firms decide to issue dividends to their shareholders from the company’s retained earnings.
Large Cap Stocks are always a safe bet, owing to the fact that they are too big to fail and they have a substantial market presence.
When markets are volatile, there is a lot of uncertainty in the market, and there are a lot of risks involved with mid-cap and small-cap companies, so it is best to stick with Large Cap Stocks.
Large-cap investments can be purchased as individual stock shares, as they are listed on recognised stock exchanges worldwide. One can also purchase them through an exchange-traded fund (ETF) that tracks a large-cap benchmark.
One can also invest in large-cap companies by selecting a few from the hundreds of large-cap mutual funds available in the market.
A large-cap company is one with a market capitalisation of more than $10 billion. Large-cap firms have a market capitalisation of Rs 20,000 crore or more.
These companies have a track record of consistent dividend payments and steady growth.
Due to their significant market presence, Large Cap Stocks are listed in broad market indices such as the NIFTY and SENSEX.
As an investor, you may be confronted with the question of large-cap vs mid-cap funds when it comes to investment. Large-cap funds invest 80% of their assets in Large Cap Stocks from reputable companies.
On the other hand, mid-cap funds invest 65 per cent of their assets in mid-cap equities of companies. If you prefer lower volatility, companies in large-cap funds provide a secure investment. However, if you an investor with a moderate risk appetite, invest in mid-cap funds.
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