Large Cap Stocks or Mid Cap Stocks -- what should you have in your portfolio?
Large Cap and Mid Cap refer to the categorisation of stocks based on the market capitalisation of the underlying company. Market capitalisation, or market cap, is the value of a publicly traded company based on the price of its outstanding common shares.
Thus, the formula for market capitalisation is:
Market capitalisation = Number of outstanding shares x Market price of each share
The typical categorisation of stocks based on the market cap is as large-cap, mid-cap or small-cap stocks.
What are Mid-Cap Stocks?
As the name suggests, the market cap of mid-cap stocks is in between the small-cap and large-cap companies. Companies with a market capitalisation between Rs 5,000 crore and Rs 20,000 crore are considered to be mid-cap.
Mid-cap stocks typically carry a greater risk than large-cap stocks but also give greater returns. But they are considered more stable than small-cap stocks. One can find a relatively less stable mid-cap stock that offers high returns due to its high growth, or a more stable and lower risk mid-cap stock that may not give as high returns. However, regardless of which end of the spectrum they fall in, mid-cap stocks are generally riskier than large-cap stocks as these companies typically are still in their growth phase. They are also more susceptible to market volatility, although not as much as small-cap stocks.
What are Large-Cap Stocks?
Large-cap stocks refer to companies with a market cap of more than Rs 20,000 crore. These stocks appear at the top of the key market indices such as the Nifty 50 and SENSEX, and many are also included on key global indices. Many large-cap stocks are also called blue chip stocks as these companies tend to be industry leaders in their sectors and have impeccable reputations and sound financials. Some examples of large-cap stocks include Reliance Industries, TCS, and HDFC Bank – all of which are companies that are industry leaders and their stocks are typically less volatile.
One of the key features of large-cap stocks is that although they are safe investments due to their financial and market stability, they typically provide moderate stock value appreciation. This is because they’re already established businesses and have gained financial maturity. However, dividend income is usually the highest in large-cap stocks.
Benefits of Mid-Cap and Large-Cap Stocks
Both mid-cap and large-cap stocks have distinct benefits. Investors can choose these based on their long-term investing goals. Investors often have a portfolio that mixes both large-cap and mid-cap stocks, and sometimes even small-cap stocks – which have a market cap of less than Rs 5,000 crore and tend to be more volatile.
Some benefits of mid-cap stocks
• Higher returns – Mid-cap stocks are typically preferred if your priority is capital appreciation.
• Availability of diversity – There is a larger number of mid-cap stocks than large-cap, offering diversity in industry, stability and risk-return, giving investors many combinations to choose from.
Some benefits of large-cap stocks
• High stability – The most prominent advantage of large-cap stocks is their stability, making for relatively safer investments.
• Higher dividend returns – Although the stock value appreciation is usually lower, dividend returns from large-cap stocks are typically higher.
• More availability – There are multiple funds and other financial products that consist of large-cap or blue chip stocks, offering higher choice and availability in investments.
• Higher liquidity – Liquidity is a measure of how easy it is to sell an asset for cash. Large-cap stocks are typically in higher demand and provide more liquidity.
Understanding large, mid, and small-cap stocks and funds is key to making better investment decisions. This knowledge can help build a well-balanced portfolio that is aligned with your investment goals.
Q. Which stocks are better for investing in?
Depending on your long-term goals and risk appetite, you can choose between large-cap and mid-cap stocks. The former provides more stability, while the latter has a better upside.
Q. Which stocks are more stable?
Usually, market stability is comparatively more in large-cap stocks.
Q. Are mid-cap stocks better for beginner investors?
There are no standard rules on which stocks to choose when starting your investment journey. Your portfolio can include both large-cap and mid-cap stocks, and even small-cap stocks, for that matter. If you have an appetite for some risk, you can build higher exposure to mid-cap stocks, but if not, a higher emphasis should be on large-cap stocks.
A dividend is a reward that a company gives its shareholders after setting aside capital to meet its expenses and growth aspirations. It shows that a company is profitable and has healthy cash flows.
A derivative is a financial instrument that derives its price and value from an underlying asset or a basket of assets.