Investing Basics: Large-Cap Stocks

Large-cap stocks are shares of the largest U.S. companies or those with market capitalizations of $10 billion or more. Large-caps are generally safer investments than their mid- and small-cap counterparts because the companies are more established, but their stocks may not offer the same potential for high returns.

What Is Market Capitalization?

Market capitalization is one of the primary ways to value publicly traded companies. Market cap measures a company’s total market value and is calculated by multiplying a company’s stock price by the number of shares outstanding. For example, a company trading at $100 a share with 500 shares would be worth $50,000 (500 shares x $100).

In the U.S., the stock market is divided into three main categories: large, mid, and small-cap stocks. Even if they operate in very different industries, companies of similar sizes and market cap generally share certain qualities that have implications for investing:

• Growth and risk prospects. Generally, the smaller and less established a company is, the more risk is associated with investing in it. That risk comes with the potential for more considerable gains than would be possible with larger, more established companies. To balance out risks and return prospects in a portfolio, experts recommend you include a mix of stocks (or funds) of large, mid, and small-cap companies.
• Fund selection. For similar reasons, fund managers often focus on the market cap when selecting stocks for their funds.
• Index membership. A company’s market cap directly influences its inclusion in major stock market benchmarks, like the S&P 500 Index. As a result, index funds that track these benchmarks are affected by these membership decisions.

You can easily find market capitalization data, real-time stock prices, and a total number of shares outstanding using stock and fund screeners, as well as resources like Morningstar, a leading investment rating agency. Large-cap market milestones are frequently covered by non-financial media, like when Apple became the first-ever U.S. company valued at $1 trillion (and later $2 trillion).

Large-Cap Stocks

Large-cap companies are likely to be well-established and dominant in their respective industry, even relatively young. That’s because some companies go public and immediately have a qualifying market cap of above $10 billion.

Large-cap companies are typically household names with a solid reputation for producing quality goods and services. Many of these companies have expanded their operations beyond the U.S. and may have diversified business that spans more than one industry. As these companies look to grow, they’ll eye opportunities to acquire smaller companies or even merge with like-sized competitors.

Still, large-cap stocks have lower growth prospects than their small- and mid-cap counterparts that are still expanding their market share. The tradeoff is that large-cap stocks are less risky and less prone to wild swings in their stock prices. As a result, large-caps are considered a more conservative investment choice than either small- or mid-caps.

The primary benchmarks for the large-cap market are:

• S&P 500 Index. The S&P 500 is considered the benchmark for the U.S. stock market, even though it focuses exclusively on the large-cap market. This index tracks the performance of the 500 largest U.S. publicly traded companies across 11 sectors. As of September 2021, the companies included in the S&P 500 had a median market cap of $21 billion.
• Dow Jones Industrial Average. The DJIA only tracks the performance of 30 companies considered “blue chips,” or those that are dominant leaders in their respective industries, except transportation and utilities. The Dow average is less representative of the large-cap market than the S&P 500 but is often cited as a benchmark.

Large-Cap vs Mid-Cap Stocks

There can be overlap between large- and mid-cap stocks, particularly among companies with market caps near that $10 billion cutoff. However, the largest large-caps (which can have market caps approaching or over $1 trillion) have very different merits as investments than the majority of mid-caps.

1. Stage in the business lifecycle. Mid-caps don’t have a foothold in their respective industry like large-caps, though that doesn’t mean they’re younger companies. Some mid-caps are rapidly growing and will become large-caps, while others are former large-caps on the decline. Mid-caps typically have a narrower line of business than large-caps, offering a smaller number of products and services.
2. Geography. Mid-cap companies may be doing business overseas, but not to the same extent as large-caps. Among the companies in the S&P MidCap 400, a benchmark for the mid-cap market, 75% of sales are generated in the U.S., compared with only 62% of sales for members of the S&P 500, according to 2019 figures compiled by S&P Dow Jones Indices. That gives large-cap companies a buffer if the economy is slowing in any particular region while exposing them to currency fluctuations.
3. Growth. Much of a company’s most significant gains have already happened by being a large-cap, whereas mid-cap companies could still be in an expansion phase. During short periods, like a matter of years, the S&P 500 has outperformed the S&P MidCap 400, but that doesn’t hold for more extended periods, like 20 or 25 years, according to data from S&P Dow Jones Indices.
4. Risk. Part of the reason large-cap stocks are typically less risky investments is that these companies are more established and provide a broader offering of products or services. Because mid-caps don’t have that same level of industry dominance, their businesses may experience fluctuations that affect their stock prices.
5. Volatility. Because of that lower relative risk, large-caps generally experience less volatility than mid-caps. Still, individual stocks within either category could experience wild price movements at any time.

Two indexes are often cited as benchmarks for the U.S. mid-cap market:

• S&P MidCap 400 Index. A counterpart to the S&P 500 Index, the S&P MidCap 400 Index tracks the performance of 400 U.S. companies with valuations between approximately $2 billion and $8 billion. The median market cap of companies in this benchmark was around $5.5 billion as of September 2021.
• Russell Midcap Index. The Russell Midcap Index tracks approximately 800 companies and is a subset of the Russell 1000 Index. The companies in this index had a median market cap of $11 billion as of September 2021.

Large-Cap vs. Small-Cap Stocks

The most significant differences in the stock market are between large-cap and small-cap stocks, which boils down to more than just the difference in size. With a much more diversified business operation, large-caps could operate units more prominent than a small-cap company’s entire operation. That translates to some different risks and rewards when investing.

1. Stage in the business lifecycle. Not all large-cap companies have decades and decades of history, but what they do have in common is maturity in their respective industry. By comparison, small-cap companies are at an earlier stage in the business cycle, with a narrow and targeted business that is still growing.
2. Geography. As more niche players are in their respective industries, small-cap companies haven’t ventured so much abroad and are primarily focused on customers in the U.S. As of 2019, 79% of sales for companies in the S&P SmallCap 600 Index were domestic, compared with only 62% of the S&P 500, according to data from S&P Dow Jones Indices. As a result, investors often consider small-caps to be a bet on gains in the U.S. economy.
3. Growth. Small-cap companies are multiplying—or have plans to do so. They may expand what or where they sell, whereas large-cap companies have already made these strides. As a result, small-cap companies have the potential to see more significant gains in their businesses (and stocks) if their plans work out.
4. Risk. However, along with the growth potential, small-caps have a higher potential for failure and are therefore riskier investments. Meanwhile, large-caps have a more diversified business and a global footprint that helps to reduce their risk of loss, which decreases the chances for investors.
5. Volatility. Because of their comparatively more significant growth potential and risk, small-caps generally experience more stock price volatility than large-caps. Of course, any individual stock could see some wild price swings higher or lower, but large-caps are less prone to that type of volatility as a group.

Two gauges are commonly cited as benchmarks for U.S. small-cap stocks:

• Russell 2000 Index. The Russell 2000 tracks the performance of approximately 2,000 of the smallest U.S. companies, with a median market cap of $1.2 billion as of September 2021.
• S&P SmallCap 600 Index. This S&P index tracks the performance of a much smaller subsection of the U.S. small-cap universe—just 600 companies with a median market cap of approximately $1.4 billion as of September 2021.

Asset Allocation and Large-Cap Stocks

Investors often gravitate to large-cap stocks for a very simple reason: These are the companies they know well and hear about all the time. As with investing in general, they are purchasing individual shares of these companies is riskier than buying a mix of them or investing in an index fund that tracks the performance of hundreds or thousands of these stocks.

Investing in large-caps as a group can balance out the risks of any individual stock while positioning you to benefit from the overall gains in the market with less risk and volatility. Large-cap stocks may recover sooner from broad market declines because these companies are better suited to weather economic downturns.

Because of this, investing solely in large-cap stocks can be tempting, but doing so limits the potential for the even more significant gains that mid or small-cap stocks might deliver. The American Association of Individual Investors recommends that investors allocate only 20% to 25% of their portfolio to large-cap stocks.

Your asset allocation could differ from these guidelines based on your risk tolerance and investment goals. Just make sure you understand the potential tradeoffs of your strategy in advance.