What Is a Large Cap Stock?

Large-cap stocks are shares of companies with a market capitalization of over $10 billion. These stocks are normally components of benchmark stock indices such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite in the U.S. 

Large-cap stocks are usually key holdings in portfolios due to the fact that they account for a considerable part of the U.S. stock market.

What is a Market Cap?

Market capitalization, or just market cap, represents the total market valuation of a company’s outstanding shares. The market cap is calculated by multiplying the total number of a stock’s outstanding shares by the current price per share. 

To give an example, if a company has 10 million shares trading at a price per share of $10, its market cap would stand at $100 million. Investors primarily look at the market cap to determine the size of the company. 

In addition, the market cap is a key aspect of acquisition deals, helping buyers determine whether the company they want to acquire represents good value.

Characteristics of Large Cap Stocks

Apart from serving as a determinant of a company’s size, looking at the market cap also provides investors with other valuable information and characteristics, such as risk. The majority of investors prefer to allocate their money to large-cap stocks because typically these are well-established, stable, financially sound companies.

Also, low-risk investors prefer to buy a group of large-cap stocks or invest in an index fund, as opposed to buying individual shares of these companies – a strategy that typically carries more risk. 

This is because investing in a mix of large-cap companies is likely to offset any significant risks of buying individual shares, placing investors in a strong position to yield returns while minimizing risk and exposure to volatility. Moreover, large-cap companies are much more likely to stay resilient during times of economic downturns and turmoil, as well as recover faster than smaller companies or startups. 

One of the core characteristics large-cap companies share is their high transparency, meaning that it is quite easy to find and review public information about these companies. 

Companies with significant market caps are also preferred by investors because they offer regular dividend payments. Thanks to their strong market position, large-cap companies are able to offer higher dividends, which naturally attracts more investors. 

Most of the large-cap companies are market leaders and the top companies in their respective industries. Market-leading companies have stable businesses that generate consistent earnings and revenues and normally move along with the market economy due to their considerable size. 

Because of their size and impact, important news about large-cap companies can also affect the broader market. Furthermore, large cap companies almost always offer forward-looking guidance that helps investors have a great degree of visibility in how the business is set to perform in the coming months and years. 

Difference Between Mega, Large, Mid, Small, and Micro Cap Stocks

Mega-cap stocks refer to the largest companies by market cap in the world. According to a general guideline, a company falls into the mega-cap category if it has a market valuation of more than $200 billion. Some examples include tech titans, like Apple, Tesla, Google’s Alphabet, etc.

As above mentioned, companies that have a market cap of $10+ billion are called large-cap companies. Large-cap companies are also reputable brands and are among the biggest players in their respective industries. 

Although it is not likely that investing in a large-cap stock will bring significant returns in the short run, investors like to back these companies because they generate consistent returns over a longer period of time and pay dividends on a regular basis. 

Mid-cap companies have a market cap that ranges between $2 billion and $10 billion. Due to this relatively narrow range, the mid-cap sector of the market isn’t as big as large caps or small caps.

Finally, small-cap companies are those with a market cap between $300 million and $2 billion. Some of these small-cap companies operate in less popular or emerging industries. Due to their considerably smaller size, less established business, and industries they serve, small-cap stocks are viewed as high-risk bets among investors. 

Smaller companies tend to be a popular choice among high-risk investors because they have high growth potential. The same goes for micro-cap companies, which have a market cap of between $50 million and $300 million. 

Micro-cap stocks are also far less transparent than the big players. These companies are also more likely to develop innovative, lesser-known products that are not familiar to the general public. This is because these companies have fewer resources to make their information available to a larger audience. 

In addition, these companies often trade on stock exchanges that do not require minimum standards, as opposed to big stock exchanges such as the New York Stock Exchange, Nasdaq, Shanghai stock exchange, etc.

3 Large Cap Stocks to Know

Starbucks (Market Cap: $104 Billion)

Starbucks (NASDAQ: SBUX) is the largest coffeehouse chain in the world. Founded in 1971 in Seattle, Washington, Starbucks engages in roasting, marketing, and retailing specialty coffee. 

Today, the company has millions of customers and over 30,000 retail stores across 83 markets. 

The company was founded by Jerry Baldwin, Gordon Bowker, and Zev Siegl, who opened their first store in Seattle and named it after Starbuck, the first mate of the Pequod in the popular novel Moby Dick. 

Starbucks recently amended its earnings forecast for the fiscal year 2022, citing higher costs as a result of the omicron virus. The company now anticipates GAAP earnings per share (EPS) to be down by 4-6% and adjusted EPS to climb by 8-10%. This compares with the previous guidance when Starbucks was expecting GAAP EPS to be -4% and adjusted EPS to rise by 10%. 

Furthermore, Starbucks expects its margins to drop by roughly 2% for the full year, citing inflation, costs related to training new employees, and coronavirus pay. The coffeehouse chain expects that its margins will recover to its long-term target of 18-19% by fiscal 2024, compared with the previous forecast when Starbucks was anticipating reaching its long-term margin goal by fiscal 2023.

AMD (Market Cap: $178 Billion)

Advanced Micro Devices (NASDAQ: AMD) is a global semiconductor company headquartered in Santa Clara, California. AMD operates through two primary segments including Computing & Graphics; and Enterprise, Embedded, and Semi-Custom. 

Through the first segment, AMD develops processors and chipsets for desktop and notebook computers, as well as integrated graphics processing units (GPU), data center and professional GPUs, and more. 

The Enterprise, Embedded, and Semi-Custom segment manufactures server and embedded processors, semi-custom System-on-Chip products, provides development services, and develops technology used in game consoles.

In February, AMD said it estimates to generate $21.5 billion in sales in 2022, which would mark a year-over-year surge of 31%, topping the analyst estimates of $19.26 billion. The semiconductor company said it expected $5 billion in sales in the first quarter, driven by strong demand for server and PC processors.

General Electric (Market Cap: $101 Billion)

General Electric Company (NYSE: GE) is a technology and financial services company that produces aircraft engines, power generation products, industrial products, and provides services for venture capital and finance, digital industry, business and consumer financing, and more. 

The company also develops renewable energy solutions and healthcare technologies used for medical imaging, diagnostics, and patient monitoring. 

Last November, GE said it plans to divide its operations into three public companies that will focus on aviation, healthcare, and energy. The company expects to complete the first spinoff of the healthcare business in 2023 and will retain a 19.9% stake in that division. 

The company then plans to combine its GE Renewable Energy, GE Power, and GE Digital businesses into a single energy unit, followed by its spinoff of this business in early 2024. 

After completing those deals, GE will become a company focused on aviation. Shares of GE soared on this announcement as investors hope the break-up will unlock new value.

For the current year, the company said it expects organic revenues to hit the high-single-digit range. GE also anticipates growth in its adjusted organic profit margin and expects full-year adjusted EPS in the range of $2.80 to $3.50. It expects robust growth of more than 20% in its aviation business, boosting the overall company performance.

Conclusion

Large-cap stocks reflect publicly-traded companies that have a market cap north of $10 billion. These companies are smaller than mega-cap but larger than mid, small, and micro-cap businesses.  

Large cap companies are usually well-run, powerful, financially robust companies. They are all profitable, generate high cash flow, and have annual revenues that are measured in billions of dollars.

They tend to be a popular investment choice for investors who are building a low-risk portfolio. Moreover, large-cap stocks generally do pay dividends or have large stock buyback programs in place.

Some of the most popular large cap stocks are Walmart, IBM, AMD, Intel, etc.

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