What are Large Cap stocks?

Every company listed on stock exchanges is valued on the basis of its market capitalisation. When you multiply the total number of shares by the stock price, the value you arrive at is called market capitalisation.

Market capitalisation, or market cap, is simply the total value the market ascribes to a company. It is a dynamic figure and changes with the movement in stock prices every day.

According to the market cap of companies, stocks can be categorised in several brackets, with prominent being three – large-cap stocks, mid-cap stocks and small-cap stocks.

What are large-cap stocks?

Generally, large-cap stocks in India are considered those whose market cap is more than Rs 20,000 crore. These are the largest companies listed on the stock exchanges. Some large-cap stocks are often regarded as blue-chip companies as these are industry leaders, financially sound and strong companies.

Association of Mutual Funds in India (AMFI), a self-regulated organisation of mutual fund companies, simply considers the top 100 companies according to their average market cap in the last six months as large-cap stocks. The next 150 stocks are considered mid-cap stocks and the rest as small-cap stocks. AMFI releases and updates the list of large-cap, mid-cap and small-cap stocks twice a year.

Meanwhile, the capital market regulator Securities & Exchange Board of India (SEBI) identifies large-cap companies as the top 100 companies based on their market capitalisation listed on the stock exchanges.

Features of large-cap stocks

Since large-cap stocks in India are some of the largest companies, they are also among the most known and most popular ones. Below are some of the key features of large-cap stocks:

High liquidity: Large-cap stocks are some of the most liquid stocks in the stock market. Since they are among the most popular ones, they are also among the most traded ones. This means buying or selling a large number of shares is possible without affecting the stock price much.

Low risk: Large cap companies are some of the most established names in India, with businesses that generate consistent revenue and cash. This means they are able to brave bad times — for example, the recent pandemic – better than smaller companies, and the risk of them going bankrupt is relatively much lower.

Lower returns: Since these companies already have established businesses, their ‘growth phase’ is largely over. Thus, though they are able to deliver constituent growth, the growth rate is much lower than smaller companies. In the stock market, companies growing at a relatively better pace are also able to deliver more stock market returns. Large cap stocks, therefore, tend to have lower returns.

Why should you invest in large-cap stocks?

Large-cap stocks are among the first options for investing, especially for those who want moderate risk and commensurate returns. Below are some of the reasons why large-cap stocks may make more sense:

Safety: Large-cap stocks are considered some of the safest investments as the risk of your capital vanishing off is among the lowest as the business is relatively stable.

Strong finances: Large-cap companies have strong finances with established revenue sources. Since they are sure about consistent cash flow, they also tend to pay regular dividends to shareholders. Thus, several investors who invest for long-term or a regular income tend to choose large-cap stocks over others.

Transparency: Generally, much more information is available about large-cap companies than mid-cap or small-cap ones. They are also mandated to furnish more information to their shareholders and the public compared to smaller companies. Moreover, such companies have large public shareholding, and their disclosures or lack thereof are keenly tracked, limiting fraud.

Advantages and drawbacks of large-cap stocks

As pointed out earlier, the most significant advantage of large-cap stocks comes with the safety and stability that they provide to investors.

However, the key drawbacks are valuation and modest returns. Since these stocks are widely tracked, it is rare to find them at a cheap valuation. In most cases, large-cap stocks are either fairly valued or overvalued. For those investors who are looking for extra returns, large-cap space provides very few options to them.

Conclusion

Large-cap stocks can be among the best investments for those seeking modest returns over the long term. They are also good for those who want consistent dividend income. However, they may not make sense for those seeking relatively higher returns and can take more risks.

FAQs

Q: What are large-cap stocks in India?

A: Large-cap stocks in India are the stocks of companies with a market capitalization of more than Rs 20,000 crore. 

Q: Are large-cap stocks a good investment option?

A: Large-cap stocks in India are some of the largest, well-established and financially sound companies. Before investing in such companies, investors must consider certain factors like their financial performance, market position, management quality, and future growth prospects.

Q: Are large-cap stocks more risky?

A: Though large-cap stocks are less risky than mid-cap and small-cap stocks, there are certain risks associated with investing in large-cap stocks like market volatility, regulatory changes, and company-specific risks.