There are currently 759 large-cap stocks listed in the United States, yet only 38 here in the United Kingdom. These are the companies with a market capitalisation greater than £10bn. And are often industry leaders with proven business models, established client bases and substantial cash flows.
Consequently, this sector of the stock market tends to be less volatile. Yet growth rates of large businesses tend to be fairly lacklustre, reducing the potential for higher returns that smaller firms can offer.
Let’s explore what percentage of large-cap stocks should be in a balanced portfolio and whether these shares are a good investment.
Understanding market capitalisation
Market capitalisation, or market cap, refers to the total value of a company in the eyes of investors. It can be calculated by multiplying the number of outstanding shares with the current stock price. Given both of these metrics can change fairly regularly, the market capitalisation of a business is constantly in flux.
If the share price falls, so does the market capitalisation, and vice versa.
Large-cap stocks are the collection of businesses with the largest market capitalisations on the stock market. They are also sometimes referred to as “Blue-Chip Stocks”, but there are additional categories that a publically-traded organisation can fall into:
- Large-cap Stocks – Companies with a market cap above £10bn.
- Mid-cap Stocks – Companies with a market cap between £2bn and £10bn.
- Small-cap Stocks – Companies with a market cap between £200m and £2bn.
- Micro-cap Stocks – Companies with a market cap between £50m and £200m.
- Penny Stocks – Companies with a market cap below £50m.
Investing in large-cap stocks
Investing in large-cap companies can be an attractive proposition for investors looking for stability. While these types of shares are not immune to volatility, they are less prone to it.
Furthermore, as these businesses are typically already established with modest growth, they often reward shareholders with a reliable stream of dividends. In fact, all of the Dividend Aristocrats are large-cap stocks. As such, investors seeking a source of passive income often turn to this area of the stock market.
Having said that, these are not risk-free investments. Their large size makes them potentially vulnerable to a more agile young disruptor. Complacency in the management team is also a common issue. And a lack of motivation to innovate can eventually lead to a firm’s products becoming obsolete, taking the revenue, earnings, and dividends with them.
Therefore, just as with any investment decision, investors need to perform due diligence and research into a business regardless of its size advantage.
Top 25 US Large-cap stocks
Here are the top 25 large-cap shares listed on the New York Stock Exchange and Nasdaq as of September 2022.
|Alphabet Inc Class A||$1.30trn|
|Berkshire Hathaway Inc Class A||$596.13bn|
|UnitedHealth Group Inc||$478.99bn|
|Johnson & Johnson||$429.29bn|
|Exxon Mobil Corp||$379.05bn|
|JPMorgan Chase & Co||$330.30bn|
|Procter & Gamble Co||$323.78bn|
|Eli Lilly And Co||$281.71bn|
|Home Depot Inc||$278.01bn|
|Bank of America Corp||$266.37bn|
|Costco Wholesale Corporation||$218.41bn|
Top 25 UK Large-cap stocks
Here are the top 25 large-cap shares listed on the London Stock Exchange as of September 2022.
|HSBC Holdings plc||£107.07bn|
|Rio Tinto plc||£79.06bn|
|BRITISH AMERICAN TOBACCO PLC||£78.00bn|
|Reckitt Benckiser Group Plc||£44.91bn|
|London Stock Exchange Group Plc||£41.99bn|
|National Grid plc||£37.81bn|
|Anglo American plc||£36.95bn|
|Lloyds Banking Group PLC||£32.82bn|
|Compass Group plc||£32.48bn|
|Vodafone Group plc||£29.92bn|
|Natwest Group PLC||£25.52bn|
Should I invest in large-cap stocks?
An investment portfolio that wins for a long time is usually one that is well diversified across industries, countries, and business sizes.
By using large-cap stocks to form a solid foundation for a portfolio, investors can expose themselves to a bit of risk with smaller businesses in the pursuit of growth without compromising their nest egg. The steady stream of dividends can also act as a source of funding for new investments.
In terms of portfolio allocation, the number of mature companies to include ultimately depends on an individual’s financial goals, time horizon, and risk tolerance. Given these are highly personal factors, different portfolios are suitable for different people.
According to the American Association of Individual Investors, the ideal allocation of large-cap shares in a portfolio should be 20% to 25%. However, a larger allocation to this stock market segment may be appropriate for investors seeking to protect wealth rather than grow it.
Are these shares a good investment?
It’s worth restating that no company is immune from the ups and downs of the market. The recent stock market correction, the 2020 Covid Crash, and the 2008 Financial Crisis are perfect examples that no business is too big to fail.
These shares can often end up with large piles of debt that can weigh down profit margins if not correctly managed.
But for the few businesses with expert leadership capable of evolving with the shifts in client demands and technological innovation, a nest egg can continue to grow steadily at lower exposure to volatility.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.