Large-cap stocks are stocks of companies with higher market capitalisation than the prescribed threshold. Different countries follow different methods to categorize large-cap stocks. In India, market capitalization categories are determined as per guidelines issued by Securities and Exchange Board of India, the capital markets regulator of the country.
Large-cap stocks belong to companies that come under the category of 1st-100th companies in terms of full market capitalization. In simple terms, these stocks belong to the 100 largest companies in terms of market capitalization and are listed on the Bombay Stock Exchange and/or the National Stock Exchange of India. For stocks that are listed on both exchanges, the average of market capitalisations is considered to determine large-cap stocks.
The Top 100 stocks list is updated every six months as per information on share prices at months ending June and December each year. This is done by the Association of Mutual Funds of India or AMFI.
Understanding Large-Cap Stocks
The market regulator in India, the Securities and Exchange Board of India (SEBI) defines the large-cap stock category as stocks of the top 100 companies on Indian stock exchanges in terms of market capitalisation.
Large-cap stocks form a major chunk of the equity markets and are often the core part of the investment portfolios of most market participants. India’s leading indices, the BSE SENSEX and NIFTY 50, primarily comprise large-cap stocks belonging to companies that are typically leaders in their respective industries, have a long history of success, and often have a recognizable brand.
Investing in large-cap stocks can be appealing to new investors because these companies are generally more stable and less volatile compared to smaller companies. Such companies have a track record of consistent performance, with steady revenue and earnings growth over time. This stability can provide a sense of security to investors, especially during market downturns, and is therefore appealing particularly to risk-averse investors looking for long-term capital appreciation and more or less consistent stable returns.
Advantages of Investing in Large Cap Stocks
Some of the core advantages of investing in large-cap stocks are highlighted hereunder.
- Large-cap stocks have a proven track record of steady performance, consistent revenue, and earnings growth.
- These companies provide more stability and experience less price volatility compared to their smaller counterparts, especially when the overall market is facing a downturn.
- Large-cap stocks are typically highly liquid providing investors with a high flexibility to enter or exit their positions quickly
- Investors also get the benefit of investing in relatively low-risk equities that can also provide them with a diversification of their portfolio.
- These companies have better access to capital, resources, and advanced technologies. This advantage allows them to invest in research and development, innovation, and expansion initiatives, positioning them well for future growth.
Characteristics of Large-Cap Companies
Here are some of the key characteristics of large-cap stocks,
Lower sensitivity to market movements
Large-cap stocks are stocks of large-sized companies that are easily recognizable and financially strong with an established distribution network. Large-cap companies are known to offer quality products and services that are popular in the market. This makes the companies more resilient to any economic slowdowns. These companies may continue to flourish or function profitably during adverse market conditions. This is one of the main reasons why large-cap stocks are less sensitive to various market fluctuations in comparison to mid-cap and small-cap companies.
These companies are large and pretty well-established, having a history of consistent performance with stable and growing earnings and profits. These companies are financially strong and mostly carry negligible or stable debt levels. They are also capable of surviving most economic uncertainties.
Large-cap stocks are often associated with premium pricing. This means their stocks may trade at higher price-to-earnings ratios compared to smaller companies. The premium pricing reflects investors’ confidence in the company’s stability, growth potential, and market leadership. However, it’s important for investors to consider valuation metrics and ensure that the stock’s price is justified based on the company’s fundamentals.
Many large-cap companies have a history of paying dividends to their shareholders which is essentially a portion of the company’s profits that are distributed to investors. Large-cap companies often have stable cash flows and generate consistent profits, allowing them to share a portion of their earnings with shareholders. Dividends can provide a regular income stream for investors or the option to reinvest in additional shares generating long term capital appreciation.
Factors to Consider When Investing in Large-Cap Stocks
While large-cap companies are less impacted by unfavorable market conditions during downturns, it is imperative for investors to look for the company’s operational efficiency through an appropriate working capital cycle. Investors should also look for an efficient cash conversion cycle. Here are some of the other important factors that investors should bear in mind while investing in large-cap stocks:
Analyzing Financial Performance and Stability
Before investing in large-cap stocks, it is essential to carefully examine the financial performance and stability of the companies under consideration. This involves evaluating key financial metrics such as earnings per share (EPS), price-to-earnings ratio (P/E ratio), return on equity (ROE), and debt-to-equity ratio. These indicators provide insights into the company’s profitability, valuation, and overall financial health, helping investors assess the company’s ability to generate consistent returns and weather market downturns.
Evaluating Dividend Policies and Payouts
One important aspect of investing in large-cap stocks is evaluating the dividend policies and payouts of the companies. Investors should review the company’s historical dividend payments, payout ratio (dividends paid as a percentage of earnings), and the consistency of dividend growth over time. Companies with a consistent and growing dividend payout demonstrate financial stability, shareholder-friendly policies, and the potential for generating a steady income stream for investors.
Assessing Market Capitalization and Liquidity
Investors considering large-cap stocks should pay attention to the market capitalization and liquidity of the companies in question. Large-cap stocks are associated with companies that have a high market capitalization, more than Rs. 20,000 crores. Investing in companies with a strong market position and widespread investor interest can provide stability and potential growth opportunities. Additionally, ensuring that the stock has sufficient liquidity is crucial, as it allows investors to buy or sell shares without significantly impacting the stock’s price and the smooth flow of transactions.
Identifying Potential Growth Opportunities
While large-cap stocks are generally considered more stable, investors should still seek companies that have potential growth opportunities. This can be assessed by examining factors such as the company’s competitive advantages, innovative products or services, expansion plans into new markets, or strategic acquisitions. Identifying companies with growth potential can enhance the potential for capital appreciation and long-term value creation.
Recommended Large-Cap Stocks for Investment
It’s important to note that stock recommendations may vary based on individual preferences, risk tolerance, and investment goals. When considering large-cap stocks for investment, investors should conduct thorough research, analyze financial statements, and consider expert opinions. Investors lacking the expertise to analyse the market and pick out individual large-cap stocks for investment can consult with a qualified financial advisor who can provide personalized recommendations that are tailored to the investor’s specific needs. Such recommendations are provided after taking into account factors such as risk appetite, return expectations, investment horizon, and financial goals.
Risk Management and Diversification
Risk management and diversification are critical strategies when investing in large-cap stocks or any other type of investment. Instead of relying on a single stock, investors should aim to build a diversified portfolio. This involves spreading investments across different sectors, industries, and asset classes to reduce the risk of adverse events affecting a specific company or sector. Diversification can help minimize portfolio volatility and potentially enhance risk-adjusted returns.
Expert Insights and Strategies
Market experts generally recommend investors to stay updated on financial news, market trends, and analyst reports to gain a broader understanding of the stock market. This can help in taking informed decisions. There are many avenues for investors to increase their knowledge base like reading books or attending seminars/webinars on investing to enhance their knowledge and decision-making abilities.
Additional read – Top stock market courses in India
Investors should try to include a combination of stocks within their portfolio instead of focusing only on one category. This helps in risk diversification and enhanced returns. With a good balance between large-cap, mid-cap, and small-cap stocks, investors can also maintain sufficient liquidity with varying investment horizons.
Market capitalization is the net valuation of a company calculated using its current share price and total number of outstanding stocks.
BSE is considered ideal for beginners, while NSE is meant for seasoned investors and traders. Investors who want to invest in stocks of new companies can opt for BSE. NSE is known to offer better software for high-risk online transactions and is therefore suited for seasoned investors.
To invest in large-cap stocks, you need a demat and trading account along with a linked bank account. You can invest in these through an online broking platform for a smooth process.
As per market strategists, an investment portfolio should allocate 50% of the funds available for stocks to large cap, 30% to mid-cap and 20% to small-cap stocks. This helps in maintaining risk, return, and investment time horizon balance.
Small-cap stocks are often riskier than large-cap stocks. Apart from lack of surety on capital growth, small-cap stocks may also not offer any dividends. Large-cap stocks offer stability and mostly pay dividends, but lack substantial capital growth opportunities.