Should you invest in large-cap stocks in the stock market?

Stocks are classified based on a company’s worth, i.e., market capitalization. To compute market capitalization, multiply the company’s total number of outstanding shares by its current share price. Based on market cap, it can be large-cap, mid-cap, and small-cap stocks. You can start investing in share market online by opening Demat Account.

How are companies categorized basis market capitalization?

  • Large-Cap: According to SEBI*, a large-cap company ranks from 1st to 100th company in terms of market capitalization in the Indian stock markets. Example: Reliance Industries Ltd., TCS, ITC Ltd., etc.
  • Mid-Cap: A mid-cap company is ranked from 101st to 250th in terms of market capitalization. Example: Jindal Steel & Power Ltd., SAIL, Voltas Ltd., etc.
  • Small-Cap: A small-cap company starts ranking 251st and below in terms of market capitalization. Example: UCO Bank, Radico Khaitan Ltd., Affle (India) Ltd.

What are Large Cap Stocks?

Large-cap stocks, also called mega-cap or blue-chip stocks are the shares of a company with the highest market capitalization among the listed companies. According to SEBI, the top 100 listed companies basis market cap form the pool of large-cap stocks.

Simply put, the top 100 companies listed in Indian stock exchanges are the large-cap companies. You can find them on the top indices of recognised exchanges. The benchmark indices in India, SENSEX & NIFTY50, include several of these companies.

Large-cap stocks are the market leaders. Any sizable swing in these stocks can impact the market significantly. These companies are relatively stable hence, experts suggest including large-cap stocks in an investment portfolio.

Features of Large Cap Stocks

Following are the primary features that define large-cap stocks:

Well Established

Large-cap corporations are well-established, financially strong companies. Many of these companies give shareholders regular dividends.

Liquidity

Liquid stock means a stock that can be bought or sold quickly and easily at a reasonable price to generate cash. Availability of higher number of buyers and sellers for a share builds up its liquidity. Many traders prefer these stocks for intraday trading. Shares of Large cap firms are the most liquid because of their widespread recognition in the stock market and the sizable pool of their investors.

Volatility and Risk

Large-cap stocks are more resilient to market changes due to their strong financial conditions. Resultant, many of them react moderately to the market volatility. These stock prices are less volatile than those of mid and small-cap stocks. Therefore, they are less risky to invest in. If an investor with a low-risk profile wants to invest in stocks entailing low risk, large-cap stocks are a good option. Large-cap corporations do not carry the risk of bankruptcy during the economic headwinds

Cost

Usually, large-cap stocks are slightly more expensive than other stocks because of their proven track records and sound financials.

Significant Impact on Market

Large-cap companies are market leaders in their respective industries with wide market recognition and financial soundness. Any news about these stocks is very much impactful for the overall market.

Research Adequacy with Rich History

The financial statements of such large-cap companies are available for the general public on their official websites. Large-cap stocks have a long track record with their established business operations. They have gained the trust of their shareholders. Investors can analyze large-cap stocks properly and the company’s performance over time before investing.

Large-Cap vs Mid-Cap vs Small-Cap

Large-Cap

 

Mid-Cap Small-Cap

 

Company Size These are companies ranked between 1st to 100th basis market capitalization in the Indian stock markets.

 

These are ranked from 101st to 250th in terms of market capitalization.

 

These are companies with a market cap ranking from 251st and later.

 

Volatility Comparatively less volatile, and the prices remain moderately stable even during a turbulent market.

 

 

The extent of Mid-cap stock price swing is slightly lower than that of large-cap stocks during a volatile market.

 

Small-cap stocks are highly volatile and swing considerably.

 

Liquidity Higher liquidity because of high demand in the stock market that eases squaring-off positions.

 

Mid-cap companies possess lower liquidity because their demand is slightly lower.

 

Small-cap companies are the least liquid, and squaring-off these positions at reasonable price is difficult.

 

Availability in Futures & Options Market Most of the shares available in the F&O market belong to the large-cap category.

 

Few shares available in the F&O market belong to the mid-cap category.

 

There is a rare or no possibility of finding a company from the small-cap category that is available in the F&O segment.

 

Shares with different market capitalization impart the diversification benefit to an investment portfolio. The stock market passes through various stages; therefore, the returns from varying types of stocks keep changing. Sometimes large caps do not perform well, but mid-and small-caps can support your portfolio, and when mid or small-cap stocks slump, the large-cap stocks in your portfolio can help you with overall returns. Therefore, it is crucial to diversify your investments across market caps as it can help to tide you over changing market conditions.

Author:

Leave a Reply