The term cap is short for market capitalisation. It is a measure of quantifying a company’s value with the help of the total number of existing shares multiplied by the price of each unit. Stocks are categorised based on their market capitalisation. Market capitalisation refers to the total worth of a company. A company’s market capitalisation is calculated by multiplying its total shares outstanding to its share unit price in the current market.
There are three categorisations: large cap, mid cap, and small cap. Large cap stocks, also known as blue-chip stocks, are the shares issued by a company with large market capitalisation – over Rs. 20,000 cr. Large cap companies act as market leaders, and even small movements in their stock price can impact the broad market because of the weightage and proportion of the overall market that large cap stocks occupy. These companies are known for stable earnings and hence enjoy a preferred status, especially among new investors and the risk adverse investor’s investment portfolio.
The following table demonstrates the classification-
Below Rs. 5,000 Crore
Within Rs. 5,000 – 20,000 Crore
Above Rs. 20,000 Crore
Why large cap stocks?
Regular dividends- Blue-chip stockholders generally receive regular dividends more often than not.
Stable portfolio- Blue-chip stocks provide stability to the portfolio since they are not very easily affected by market sentiment. They can balance the risk in the portfolio effectively. A large cap company is rarely insolvent and hence can be an excellent option for hedging.
Rich history- Companies in large-cap stocks list have been in business for a long period. They possess a rich operational history accessible to the general public through various means, thus reposing trust. It can be used by potential investors for analysis.
Low-risk- Large-cap companies have a robust financial infrastructure, fortitude, and soundness. Ergo, large-cap shares react mildly to market volatility. It significantly lowers the risk on such investments, because, unlike mid-cap and small-cap companies, they do not run the risk of dissolution during market contraction, and can still afford to continue their business operations.
Liquid- There is the most liquid investment options in the market because of their widespread popularity and readily available buyers.
Financial factors to be considered while investing in large cap stocks
Quality of management and business
Industry trends to grow significantly in the years ahead and sync with the economy
Company’s ability to generate cash flows consistently
A low debt to equity ratio
High return ratio
High-interest coverage ratio
Expensive stocks- You require substantial capital to invest in large cap stocks with a resolve to stay invested for several years. An individual with low disposable income may not have such financial stability. Thus, every individual may not be able to afford these stocks. Take for example, a blue chip stock trading at Rs. 2,000. In such a case, only a lump sum amount invested could garner gains for the investor.
Low capital appreciation- One of the major drawbacks of large-cap stocks is their limited potential for capital appreciation. Due to their mild response to market fluctuations, the stock values do not go up as much as mid-cap and small-cap stocks during the bullish market.
Alternative Options to Large-Cap Stocks
Exchange-Traded Funds- ETFs are a type of Mutual Funds that are traded on recognised stock exchanges. These funds can include shares and fixed income securities such as debentures, treasury bills, bonds, etc. Exchange-Traded Funds are a lucrative option for novice investors as they exhibit stock-like characteristics and other factors such as low-cost and tax efficiency.
Equity Funds- They are a form of Mutual Funds where the pooled investment is used to purchase equity shares or stocks. They offer returns similar to stocks while minimising the risk factor.
Large cap stocks are shares issued by large cap corporations that are backed by a long history of strong financials and market trust. They make a good choice for portfolio allocation as they are less vulnerable to market changes and more often than not provide regular dividends.