Large-Cap Stocks: What It Is & How to Invest in Them

Investing
Updated: 18th Dec 2020
Written by Sean Graytok
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Investing
December 18, 2020
Written by Sean Graytok

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Corporations come in all shapes and sizes. Some are small, some are large, and some fall in between. Today, we will cover the heavyweight division: large-cap stocks.

The market capitalization, or “market cap,” describes the size of a company. Market cap is calculated by multiplying the current share price by the total amount of the company’s outstanding shares.

What Are Large-Cap Stocks?

While this range may vary from one brokerage firm to the next, a corporation’s market cap must be at least $10 billion to be considered a large-cap stock. Remember:

Market Cap = Share price x Total Number of Shares Outstanding

While only two metrics are required to calculate market cap, it can summarize several traits of the company. Do not confuse large-cap stocks with small-cap stocks. They are fundamentally different. We’ll dive into the specific features of large-caps next.

Large-Cap Stock Features:

These are textbook characteristics of large-caps and do not always come to fruition. Regardless, it is still useful to know how large-caps theoretically behave for macroeconomic purposes.

  • Large-caps are considered more stable than small-caps
  • Large caps are backed by institutional traders (banks and hedge funds)
  • Large-cap Stocks have access to cheap capital
  • Large-caps Stocks are impacted by foreign and domestic news
  • Large caps get more attention from the media because they make up most funds that people have equity in.
  • Some large-caps’ are in the final stages of growth and investors flock to them for dividends

Examples of Large-Cap Stocks

  • Microsoft (MSFT)
  • Apple (AAPL)
  • Alphabet (GOOG, GOOGL)
  • Facebook (FB)

That’s a lot of technology! Over the last decade, these technology companies have been celebrated for their growth and innovation.

However, some argue that they’ve become too big and are calling for antitrust intervention. Let’s look at some more large-cap companies:

  • Johnson & Johnson (JNJ)
  • Procter & Gamble (PG)
  • Berkshire Hathaway Inc. (BRK.A, BRK.B)
  • Visa (V)
  • JPMorgan (JPM)

As you can see, large caps are not specific to one sector. They have representations from all 11 sectors of the stock market: Financials, Utilities, Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Technology, Telecom, Materials, and Real Estate.

Related: Small-Cap vs Large Cap Stocks

Are Large-Cap Stocks Risky?

Large-caps are generally accepted as less risky investments than small-caps. This is due to their institutional backing that can throw them life-rings during economic storms.

Additionally, without fraud or extremely negligent leadership, it is difficult for a $10 billion company to go to zero.

But large-caps can still fail. Fortune magazine named Enron “American’s Most Innovative Company” for six consecutive years from 1995 to 2000.

Months later, the company’s share price went from $90.75 at its peak to $0.26 at bankruptcy after Enron’s creative accounting revealed institutionalized fraud at its highest levels of leadership.

Granted, using bankruptcy as the only determination for risk is not the optimal investment strategy. Large-caps are still susceptible to major pullbacks in their stock price.

Are Large-Cap Stocks a Good Investment?

It is difficult to invest in the stock market and not have exposure to large-cap stocks.

They are the most well-known stocks for a reason: the market rewards companies that create value! If there’s demand, there are plenty of institutional investors that ensure the company has the means to supply.

However, some large-caps have capped out their growth. Several industries have been disrupted by new technology and will be phased out if they fail to innovate.

The companies that facilitate the disruption may run into their own set of problems, such as regulatory crackdowns.

For example, while technology companies like Google, Amazon, and Facebook are synonymous with innovation, some argue their anticompetitive behavior stifles progress.

Are we promoting innovation if Facebook simply acquires its competition before they are ever a threat? Or if we allow them to copy Vine, Snapchat, and TikTok’s tech?

These questions may be outside the scope of “Are Large-Cap Stocks a Good Investment?” but should be considered because they might impact the company’s future performance.

How to Invest in Large-Cap Stocks (Our Playbook)

#1 Choose a Stock Broker:

Choose a commission-free brokerage service that offers a full suite of investing tools. We personally like Webull.

With no account minimum, you can start trading on their mobile app with the other nine million investors on their platform. Read our Webull review or check out our input on other brokers like M1 Finance, Acorns, or Robinhood.

#2 Fund Your Account:

Simply add your bank account and deposit cash. The best online stock brokers employ robust technology that makes this step seamless.

#3 Purchase Large-Cap Stocks

You can buy the S&P 500 to get exposure to the 500 largest U.S. publicly traded companies. This index has generated about 10%-11% annual average returns since its inception in 1926.

However, some investors opt for individual stocks in the hopes of outperforming the benchmark. If you’re one of the people, be sure to do your own research!

Next, we’ll discuss some great sources of information on large-cap stocks.

How to Research Large-Cap Stocks

The amount of information on large-cap stocks may overwhelm some investors. Financial terms like alpha, beta, and EBITDA may confuse novice traders! Not to worry, the following resources have your back:

Motley Fool

Motley Fool is a one-stop-shop for retail investors. They offer free and paid content that empowers investors to make informed decisions.

Motley Fool’s financial and investing advice has been making its readers money since 1993.

Learn how you can get in on the action by reading our Motley Fool Review.

Tradingview

Tradingview’s charts let traders use hundreds of financial indicators to supplement their investing decisions.

Their basic plan is free and includes tools for technical analysis, stock to stock comparisons, and much more. Get started on Tradingview today or see our Best Free Stock Chart Websites.

Barron’s

Few publications have the respect from Wall Street like Barron’s Magazine. It was founded in 1921 and has been trusted for its market commentary during the market’s historical events.

Barron’s is behind a paywall for a good reason. Its world-class contributors share investing ideas and market insights that are not available anywhere else.

Additionally, Barron’s has a weekly podcast, “Barron’s Streetwise,” hosted by Jack Hough. They are 23-30-minute episodes and jam-packed with coverage that will add value to your portfolio.

Learn More: Best Financial Magazines

Yahoo Finance

Yahoo! Finance offers financial news, data, and original content. Millions rely on their real-time stock quotes for accurate pricing.

Yahoo! Finance offers free and a premium plan of $34.99/month to help people accomplish their investing goals.

CNBC

CNBC is one of the largest news sources for U.S. and world markets. You can visit their website or watch their market coverage on TV.

CNBC has many Wall Street personalities, such as Downtown Josh Brown, that provide a fun yet informative coverage on the day’s events.

Learn More: Best Stock Market Research Websites

Large-Cap Stocks and Asset Allocation

Asset allocation is the mix of assets to hold in a portfolio. The classic “60/40 portfolio” is referring to its asset allocation, more specifically 60% stocks and 40% bonds. As an investor, you need to allocate large-cap stocks strategically.

The American Association of Individual Investors recommends investors to have 20% to 25% of their portfolio in large-cap stocks.

However, this is a suggestion that does not recognize the vast differences in risk tolerance, time horizon, and goals amongst investors.

Investors between the ages of 20-40 can take larger risks compared to the gentleman that wants to retire tomorrow.

Young investors can recover from pullbacks in their individual large-cap stocks because they have more years of earning potential than their elders.

Finding the right asset allocation depends on the variables we mentioned above: risk tolerance, time horizon, and your individual goals. Asking yourself some questions may help you solve your allocation problems.

  • Am I okay if Tesla experiences a massive pullback to reality?
  • Why Am I investing in this company?
  • Am I confident that this company can outperform the benchmark?
  • Can I sleep at night taking on this kind of personal exposure?

Fortunately, you can adjust your asset allocation at any time, and many investors rebalance their portfolio annually.

Your investing strategies will most likely transform over time, and your allocation should reflect these changes.

Large-Cap ETFs to Consider

  • Vanguard S&P 500 ETF (VOO): Expense Ratio: 0.03
  • SPDR S&P 500 ETF (SPY): Expense Ratio: 0.09
  • Invesco QQQ (QQQ): Tech heavy index that follows the NASDAQ. Expense Ratio: 0.20.
  • Vanguard Information Technology ETF (VGT): Expense Ratio: 0.10
  • Vanguard Mega Cap Growth ETF (MGK): Under 200 holdings. Expense Ratio: 0.07
  • SPDR S&P Dividend ETF (SDY): Dividend-paying large-caps. Expense Ratio: 0.35
  • Vanguard Consumer Staples ETF (VDC): Companies that produce food and beverage, household goods, and hygiene products. Expense Ratio: 0.10
  • iShares U.S. Dividend and Buyback ETF (DIVB): Similar to SDY, but considers companies that often buy back their stock. Expense Ratio: 0.25

As you can see, the Vanguard funds have favorable expense ratios. For example, if you had $10,000 invested in an index with an annual expense ratio of 0.68%, you would pay the fund $68 a year in management fees.

See our beginner’s guide to investing in the S&P 500.

Why Should You Invest in Large-Cap Stocks?

A healthy portfolio is diversified into many asset classes, and large-cap stocks should be one of those assets.

The S&P 500 is the most recognizable index for a reason! It is made up of the most reputable companies with a proven track record of success.

Additionally, the index has recorded 10%-11% annualized gains. Combine this with a long enough time horizon, and your portfolio is poised to do damage!

Dive Deeper: How to Start Investing

Bottom Line: Large-Cap Stocks

Understanding the pros and cons of large-cap stocks allows you to make macro-plays on the market. Yes, each situation can be different, but sometimes they’re not.

We hope this article enhanced your grasp on large-cap stocks, and how to make them work for you. Now, open an account and pick your winners.

More Investing Resources:

Sean Graytok
Sean Graytok
Sean is a lifelong student of the financial, media, and marketing industries. He is a Generation Z investing expert and is on a mission to empower investors to make the most of their money.