The Quest for Good ‘Large Cap’ Stocks in a Record High Bull Market
$DIA, $SPY, $QQQ, $AAPL, $WMT, $FB
Large cap refers to large market capitalization. “Large Cap” is a term used by the investment community.
Cap size has changed over time, so it is important to take scaling into consideration. What was considered a big cap stock 30 years ago is a small cap stock today.
Commonly referred to as Blue Chip stocks, Aristocrat, or the “leadership” the largest publicly traded companies have a cap of $10-B or higher. They are most often the best-known companies traded in the public market such as Apple, Wal-Mart, GM, GE, or Facebook.
Wall Street’s attention is concentrated heavily on these giants because it is where the lucrative investment banking business resides, but the majority of stocks are found in the smaller and riskier caps.
Large cap mutual funds consist of companies with market caps of $8-B or more. Mutual funds actually have restrictions on the level of ownership they can have in any one company, meaning no more than 10% of their outstanding shares.
So, these funds are forced to imitate a larger index.
This forces the big cap funds to purchase large companies, the same companies that make up the major market indexes like the DJIA, S&P 500 and the NAS Comp.
There are lots of large cap income funds that are very suitable for risk-averse investors. Investors with large time horizons tend to rely on more passive investing strategies.
Large cap mutual funds would be appealing to these participants, as their aim to buy and hold.
When choosing between a small, medium or large cap mutual fund, be sure to take into consideration not only its size but also in which investing style the fund specializes.
Blue chip stocks should be a part of any properly diversified portfolio.
Many think that these Aristocrat stocks are too conservative, but they do see incredible amounts of trading and speculation on a daily basis. Even these companies see price fluctuations that cause investors to panic or cash out.
Below are the main reasons why risk adverse participants want to own some large cap stocks, as follows:
Their size makes big cap companies relatively stable compared to smaller caps. They are much less likely to go under, but their growth rate is slow in comparison to Go-Go growth issues. These companies are typically market leaders aka the leadership stocks, so while it it difficult for them to grow as quickly as up-and-coming Go-Go issues, they are the much safer investment.
Large cap stock companies are likely to pay dividends. They know the stock price is not likely to appreciate in value as quickly as a growth company’s. Big cap companies are Super profitable, yes. But they do not have the same opportunity to grow. Their stock price usually remains stagnant, so they pay dividends in order to compensate their investors.
During the inevitable downturn in the business cycle is when large cap companies are Extra Hot. These “whales” are not necessarily immune to recessions, but they are more stable in the face of one. Dividend payments are also an attractive source of income when bond yields are low.
Again, the majority of stocks are found in smaller caps, large cap stocks are better known and thus garner most Wall Street’s focus.
Remember, it is your money, and therefore your responsibility to find the investments suitable to your tolerance to Risk