I’m sure you’ve heard of the term ‘asset allocation’. It can help an investor to balance risk and reward using a well-thought-out portfolio. Many investors include large cap stocks in their asset allocation due to the unique advantages that they offer.
If you have been thinking about adding large cap stocks to your portfolio, there are some notable pros and cons you must consider. In this article, we will discuss those and it will help you decide for yourself if an investment in them is right for you.
They generally offer more stability and lower risk and many also come with potentially unmatched benefits, including dividend payments. However, they are still not suitable for everyone. The biggest boon can quickly become the biggest bane. I will show you everything about these stocks shortly.
Getting to Know Large Cap Stocks
Here’s a quick recap to help you understand what lthey are. Company stocks can either be a small cap, large cap, or mid cap. The word “cap” here refers to market capitalization
The stock of a company that has a market capitalization higher than $10 billion is considered a large cap stock. You will immediately realize that these stocks are associated with large enterprises, many of which have been operating in the market for years. They have firmly established businesses and that is one reason that these large enterprises tend to make them less risky investments.
Let us look at the potential rewards of large cap stocks; without a doubt, they dop make for promising investments.
- Earning dividends: The stock prices of large cap stocks don’t fluctuate much and the companies are already stable in their areas of business. What this means is that there isn’t much potential for earning lots of profits through price movements. To benefit investors, many large stock companies pay dividends to their shareholders. These dividends quickly add up to yield considerable returns. If you are looking for low-risk investments, large cap stocks offering dividends are a great option to consider.
- Low-risk and stable investments: Large cap companies are some of the most widely recognized and established companies in their respective industries. Automatically this means that any investment in their stocks is likely to remain stable with lower risk. Economic crises might arise in small and even mid cap companies at times, but, large cap companies tend to offer unparalleled stability to the investor and they are highly unlikely to go out of business. This element of security is what makes them promising options for investors with their combinations of lower-risk and increased durability.
- Ease of information availability: If there’s one thing that should be a key driver in determining whether you should be investing in a specific stock, it should be the availability of information about the company. You will need access to the company’s financial statements and records and these will help you to decide if the investment will be profitable and whether it suits your portfolio. Large cap companies are gigantic publicly traded enterprises which are required to reveal financial specifics to shareholders from time to time. Transparency is vital in trading, and they can offer plenty of that. With greater transparency comes better informed decision-making.
- Blue-chip stocks: Blue chip stocks are stocks that are associated with companies that have been in business for years. These are highly sought after commodities considering there are decades of historical data for the investor to analyze and assess future trends based on previous behavior. Blue-chip companies generally operate in multiple sectors, which reduce the magnitude of risk should one of their businesses have lower than average earnings.
- Low volatility: They have much lower volatility than small cap stocks. Volatility measures how much the price fluctuates in the market.
- Easy to sell: It is also obviously much simpler to sell them because they will tend to find many buyers. It is likely that you will always be able to find someone willing to invest in some of the planet’s largest companies. Small cap stock owners, on the other hand, might have problems finding suitable buyers when they need to exit a position.
It’s important to remember these when you’re investing in them and you should carefully weigh both the advantages and disadvantages of large cap stocks. There is a fine line between the pros and cons, and what is a decisive factor for someone might be a negative consideration for another.
It would help if you also considered this article where we discuss blue-chip stocks in greater detail. In the article, we will also discuss some of the main characteristics of blue-chip stocks and how you can use them to the best effect.
If you thought large cap stocks are infallible, think again. There are some specific shortcomings associated with them. It’s now time for us to examine the disadvantages of large cap stocks.
- Lower returns: The returns on large cap stocks may not be very high even though their prices are primarily stable. The association of the most significant advantage of large cap stocks with the top companies can also become the biggest curse in terms of the potential for growth. When you are already at the top, where is the space to grow further? Small stock funds, on the other hand, can show tremendous growth levels.
- Reduced ownership levels: Whenever you purchase the stocks of a public company, you acquire your say in the company decisions because companies conduct periodic meetings where shareholders can vote. However considering the sheer scale of the large cap companies, your ownership share in the enterprise is likely to be much smaller. It’s like a drop in the ocean unless you happen to own many shares.
- Risk-takers might be disappointed: If you’re seeking to capitalize on risk, large cap stocks are certainly not the best choice. They should not even be a consideration since they are best for those with a lower appetite for risk. Large cap stock investments are suitable for those looking for steady returns with minimal risks.
- Bad short-term investments: If all you are looking for is an investment that can yield short-term benefits, look elsewhere. Large cap stocks yield great benefits but only in the long-term. It would be best if you were patient to reap the advantages.
Should You Invest in Large Cap Stocks?
Now that you’re aware of the pros and cons of large cap stocks, you might be wondering if they are suitable for your case. How do you decide if you should be including these in your portfolio?
What may matter is how diversified your investments are and you cannot overlook the very significant advantages that they offer including the promise of steady dividends, stability, and low risk. You also possess partial ownership in some of the most respected companies on earth.
However, this does not mean that they are without their fair share of disadvantages just as we saw above. It would help if you aimed to invest in both small and large cap stocks. The former will promise you more returns with significant room for growth, and the latter will balance out the risks and introduce stability in your asset allocation.
With large cap stocks, you will find a lot of data available for you to use and benefit from. With small cap stocks, on the other hand, you may need to do much more research to find relevant information.
The market capitalization of companies is a critical factor to consider because it is a measure of the company’s size.
Large cap stocks have some very promising advantages that make them ideal for lower-risk investments. They may also pay out regular dividends and can help to build long-term profits. Do you want steady earnings without the hassles associated with risky market movements? They may be ideal choices then.
Do you wish to profit from instability considerations and have a bigger appetite for risk? You might then be disappointed with the very characteristics of large cap stocks.
The recommended strategy is to have a portfolio with the right mix of all investment types that suit your risk tolerance while yielding rewards.
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