Investing in large-cap stocks or big-cap stocks is common among investors seeking to maximize the benefits of both growth investing and value investing. Note that these stocks are issued by companies with a market capitalization of $10 billion or more. They also comprise a significant portion of the stock markets or equity markets of developed countries such as the United States and undergo high volumes of trading in a single day.
When compared with small-cap stocks and mid-cap stocks, large-cap stocks have specific advantages or benefits attuned to specific investment goals and objectives. Of course, these stocks also have notable disadvantages or drawbacks and risks while also sharing the same overall disadvantages and risks of investing in stocks. This article identifies and discusses the pros and cons of investing in large-cap stocks.
A Look Into The Pros And Cons Of Large-Cap Investing
Pros: Advantages of Large-Cap Stocks
Large-cap stocks or large-sized companies started as small-cap stocks and mid-cap stocks. The obvious advantage of investing in these companies is their tested and proven business models that enable them to stand the test of time and maintain their status in their respective markets or industries. The following are the specific benefits of large-cap investing:
1. Established Companies Provide Stability and Security
One of the obvious advantages of large-cap stocks is that investing in them can provide investors with relative security over their investments. Remember that the issuing companies are already stable. Most large-cap companies are leaders in their markets or industries. Investing in them allows investors to lessen the risks in their stock portfolio, especially if they also invest in riskier stocks such as small-cap stocks and mid-cap stocks.
2. Tested and Proven Model and Management Capabilities
Larger and more established companies have remained in business because of their business models. Think of companies such as Apple and Ford as examples. Furthermore, because of their tenure, these organizations have a more sophisticated approach to management and leadership. Both their effective business models and management capabilities can give investors a sense of assurance that their investments are handled well.
3. Potential for Receiving Stable Dividend Payouts
Small-cap and mid-cap stocks can issue preferred stocks or dividend-paying stocks. However, because of the greater uncertainties as regards the stability of these companies, their dividend payouts also pose the same variability. Large-cap stocks do not appreciate as much as small-cap and mid-cap stocks but their dividend payouts are more regular and stable. Investing in these stocks is ideal for investors seeking to generate a passive stream of income.
4. Availability of Market Information and Transparency
Another advantage of investing in large-cap stocks is the availability of market information that can help individuals or institutions with their investment decisions. Analysts and the media often produce research regarding the performance of these companies. These companies themselves also publish internal documents such as financial statements, annual reports, and strategic directives to inform their investors and stakeholders.
5. Higher Liquidity Than Small-Cap and Mid-Cap Stocks
Remember that large-cap stocks represent a significant portion of the stock market and a considerable volume of day-to-day trading. This means that these stocks are more liquid than small-cap stocks and mid-cap stocks. They can be purchased through online-enabled brokers and other trading platforms and can be sold using the same platforms. Investing in large-cap stocks lowers the liquidity risks that come with stock investing.
Cons: Disadvantages of Large-Cap Stocks
The fact that large-cap stocks or large-sized companies are more established and stable mean that they have notable competitive edge over medium-sized and small-sized companies. However, the same soundness of their business models and overall stability also draw unique issues. The following are the specific disadvantages of investing in large-cap stocks:
1. More Exposure to Global Economic Downturns
Investing in large-cap stocks exposes an investor to systematic risks that come from global economic affairs. Most large companies generate revenues from global sales or are highly dependent on global trade both for their sales and supplies. A disruption in the global supply chain or an economic crisis that affects different geographical markets can affect the performance and profitability of these organizations.
2. Restricted Potential for Substantial Growth in Investments
Another disadvantage of large-cap stocks is that they have limited potential for sky-high capital appreciation. The stocks of large companies are not slated for higher growth rates because they are already well-established in the market. Their stock prices are also more expensive. Hence, when it comes to substantial long-term investment growth through the appreciation of stock prices, small-cap stocks and mid-cap stocks tend to perform better.
3. Lower Possibility for Significant Ownership and Control
Investors seeking to eventually own a substantial amount of shares in hopes that will get a significant level of ownership and control are better off investing in small-cap and mid-cap stocks. Large-cap stocks limit the issuance of common stocks and prefer issuing preferred stocks to prevent a hostile takeover. Furthermore, because of their higher market capitalization, it is impossible to gain control without spending huge amounts of money.
Important Pointers Before Investing in Large-Cap Stocks
The aforementioned advantages and disadvantages of large-cap stocks collectively boil down to the fact that investing in these stocks is suited for less-aggressive investors who are still willing to take the risks that come with stock market investing but want to either diversify their stocks portfolio or choose the safest types of stocks to invest in.
Furthermore, based on their slower and lower growth potential, investing in large-cap stocks is not ideal for day trading or quicker buy-and-sell transactions. These stocks are better suited for income-seeking and value-seeking investors who prioritize buy-and-hold investing or passive investment strategy over active investing or traders involved in frequent trading activities.