Large-Cap Stock Investing

Large-cap (large market capitalization) is a term used to describe the stocks of the largest companies, those companies whose market capitalization exceeds $10 billion. Because of their size, large-cap stocks tend not to be viewed as speculative. Instead, large-caps are considered by many to be perfect for defensive investing because of their size, relative stability, and tendency to offer consistent dividend payments. Buying large-cap stocks is investing in the largest and most well established companies in the world today. These companies are proven performers with dependable earnings.

Market capitalization (”market cap”) is simply a snapshot of the value of a company and is calculated by multiplying the number of outstanding shares the company has outstanding by current the price per share. Given that, market capitalizations are only current approximations that change over time with the company stock price and number of shares outstanding.

Large-caps, particularly those that are considered “blue chip” can provide a solid foundation in a stock portfolio given their relatively limited downside risk and income potential. While the low volatility they offer can limit their upside potential, reinvesting the dividends can help compensate for that limitation.

Conventional asset allocation theory advises investing a percentage of your portfolio in large-cap stocks, regardless of the state of the economy. Many prominent investors, including Benjamin Graham, have noted that the revenues of smaller companies are more prone to fluctuations than larger companies. In fact, Graham went so far as to recommend that a company should have (in today’s dollars) about $460 million in annual sales to provide a desired level of stability.

Historical data indicates that the time to buy large cap stocks is at the beginning of an upturn in the economy. Supporting this theory is the fact that the stocks of large companies outperformed smaller-caps in the growth period of the 1920s and more recently during the growth period that began in 1982. From that year through 1996, large-cap growth outpaced the growth of smaller-caps by twice the amount. Large-caps have also proven to be the earliest to recover when market conditions start improving after an economic downturn.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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