What is Large Cap Stock?

Market CapitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more is the wallet share the firm is having in the industry and is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. Stocks are generally classified as:

  • Large Cap (Greater than $10 bn)Mid Cap stockMid Cap StockMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion.read more (between $2bn to $10 bn)Small-CapSmall-CapSmall cap stocks are offered by relatively small companies that are publicly listed. A small cap company has a low market capitalization ranging between $300 million to $2 billion. Small cap investors have a high-risk, high-reward approach.read more (between $300mn – $2 bn)

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Top 20 Large Cap Stocks in the US

Benefits of Investing in Large Cap Companies

Some of the important reasons to invest in Large Cap companies are:

  • Large Cap companies are generally very stable, making them a safer investment opportunity compared to others. They are the top businesses in their respective industries and can be considered as Market leaders. However, their stock prices may not grow as fast as other smaller companies making them less suitable for all kinds of investors. It is due to limited opportunities to grow after occupying a successful position in the industry.Large Cap stocks are generally preferred in case of business cyclesBusiness CyclesThe business cycle refers to the alternating phases of economic growth and decline.read more going through turbulent times. It is because they are a safer investment and can comparatively withstand a slow down without the threat running out of business. It does not mean they are immune to recessions but have a better ability to handle difficult economic scenarios.Generally, these large-cap stocks pay a dividend regularly as the companies know the stock probably will not appreciate in value as swiftly as a Growth company. It offers another source of income for conservative investors. It is very useful for investors when bond yieldsBond YieldsThe bond yield formula evaluates the returns from investment in a given bond. It is calculated as the percentage of the annual coupon payment to the bond price. The annual coupon payment is depicted by multiplying the bond’s face value with the coupon rate.read more are low. These companies may be profitable but do not have opportunities to grow. Accordingly, investors have to be compensated for the stagnant stock price and have earnings in the form of a dividend.These large-cap stocks are more liquid, making them easier to exit at any point in time. These firms are used as Core long-term investments in a portfolio due to the above factors. Thus, they can occupy a significant section in the allocation of a client’s investment depending on their financial objectives and risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more.

Rally of Large-Cap Stocks

The Large Cap stocks of the US have been outperforming since 2013 and are expected to continue in the short-run. The reasons for it are:

#1 – Large Cap Stocks are more Internationally oriented and gain from USD weakness

The S&P 500 has been outperforming the Russell 2000 along with the weakening dollar in 2017. It is due to the USD depreciation offering large MNC’s a boost through:

  • Foreign Sales and ExportsDemand CreationEffects of Positive Accounting translationIncreased Competitiveness

Sub-par domestic economic outcomes and improving foreign prospects suggest US investors should stay focused on the S&P 500. Geographic revenue analysis states that the Large Cap companies of the US have foreign exposures as 30% of the S&P 500 revenues come from outside the US.

#2 – Earnings from Large Caps Companies Benefit from Lower Effective Corporate Tax rates

Incentives and credits can create a difference in how much a company pays in taxes by effectively lowering a firm’s taxable income. To be eligible for these tax breaksTax BreaksA tax break is a tax benefit or tax concession allowed by the government to encourage businesses to increase their investments, ultimately boosting the economy. It comes in a variety of ways, such as claiming tax deductions or excluding profits from tax returns.read more requires spending a significant amount of money, which may not be suitable for smaller companies and start-ups. Large Cap stocks can reduce their financial resources in several ways since a lot of money is spent, which may not necessarily be justified.

The US Internal Revenue Service doesn’t tax income earned in foreign countries, and many of them have lower Corporate taxCorporate TaxCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more rates than the US. It makes them outsource many of their functions to foreign countries, which in turn proves to be a cheaper option.

#3 – Tighter US Monetary Policy and a Flatter Yield Curve Spurs Large Cap Leadership

The US Treasury yield curveYield CurveA yield curve is a plot of bond yields of a particular issuer on the vertical axis (Y-axis) against various tenors/maturities on the horizontal axis (X-axis). The slope of the yield curve provides an estimate of expected interest rate fluctuations in the future and the level of economic activity. read more is one of the leading economic indicators. A direct relationship existed between the yield curve and the performance of the Russell 2000 relative to the S&P 500. A steepening curve today indicates positivity for higher-beta segments of the equity marketThe Equity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more. Conversely, a flattening curve now points to more challenging economic conditions down the road and bad news for economy-sensitive segments of the stock market.

When the FED commences normalizing the monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more, raising of interest rates, flattening the curve, and not encouraging to take risks, the mature and the established firms in the US equity tend to benefit, which reflects the current scenario in the US.

This article has been a guide to what are large-cap stocks. Here we list the top 20 large-cap companies along with the benefits of investing in large-cap companies. You may also have a look at these articles below to learn more about Corporate Finance –

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