Based on their market capitalization, stocks can be classified into three types- large-cap, mid-cap and small-cap. To be called large-cap, the market capitalization of a company must be above Rs. 20,000 crores. Large-cap stocks are the most valuable in terms of market capitalization.
As the name suggests, large-cap stocks belong to well-established companies which have been around for many years.
Investing in large-cap stocks is generally considered to be safe as these companies have strong market presence. Some of the top large cap stocks belong to companies in the e-commerce, FMCG, social media and financial services sectors. Generally, large cap companies are used as long-term investments because of their stability and dividend potential.
Read on to know more.
Why should you invest in large cap stocks?
TransparencyLarge-cap companies are transparent. As they have been in the business for a longer period, investors have access to adequate data to study the performance of the company over the years. You can derive specific insights such as long-term growth trends and stock movement before buying.
Investing in large-cap stock companies is relatively low-risk as compared to mid and small-cap stock companies.
StabilityLarge-cap stocks are stable compared to small or mid-cap, making them ideal for those with a long- term investment horizon. However, they are not immune to market dynamics. The caveat is that the stock prices of these companies may not grow as fast as start-ups or mid-size companies.
For investors who have a high risk-appetite, large-cap stocks may not offer high growth potential.
Management qualityThe management team plays a significant role in the progress of a company. Usually, the board of directors of large-cap companies is industry veterans with considerable experience. They in turn, hire high-quality talent for leadership positions in the company such as CEO, CFO, etc.
Since the management team is responsible for the long-term direction of the company, any senior-level appointments are watched with keen interest by investors.The broad skills and experience of the management team inspires confidence in investors about the long-term growth prospects of the company.
Dividend payoutsInvestors often bet big on large cap stocks in terms of balancing their investment portfolio. Large-cap stocks may offer consistent dividend payouts over a period of time which can offset low returns from small-cap stock investments.
During cyclic market fluctuations, large-cap stocks generally are among the first to rally, giving institutional and individual investors greater confidence. A mix of large, medium and small stocks is ideal for ensuring the best returns.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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