Large Cap Stocks

Large caps are companies with market capitalization value that exceeds $10 billion. This category includes a subcategory of companies known as the Blue Chips.

The name ‘blue chip’ comes from poker, where blue chips usually have the highest value. A blue-chip stock is a stock of a large-cap company that has an established record of financial strength, stability, and profitability. Blue-chip stocks are high-quality investments and are often priced quite high due to their reliability in bull and bear markets. Although there are no specific requirements to be classified as a blue chip, such companies are widely known as leaders in their industry.

The most solid “blue chip” stocks on the market are covered by the famous Dow Jones Industrial Average (Dow 30) index.

Investing in large caps or blue chips generally bears the least amount of risk when compared to mid and small cap stocks. Such companies have enough assets to help them weather economic downturns. They generate consistent earnings and also generally have lower betas than mid and small caps.

Beta (β or beta coefficient) of an investment measures of the amount of risk arising from the investment’s exposure to general market movements. Betas are used as a measure of volatility, or systematic risk, of a stock or a portfolio in comparison to the market as a whole.

Because of lower risks, large caps have historically offered lower returns than mid and small cap stocks. Large caps also have less growth potential than mid and small caps. They’re also in high demand as everyone sees these stocks as low-risk investment opportunities. Thus, their prices are generally higher than mid and small caps.

Large caps can also be used to shield portfolios from huge losses during bear markets. Such investments are often valuable to income investors since these companies also provide stable dividend income.