These companies make up the popular Dow Jones Industrial Average.
Large cap is a money term you need to understand. Here’s what it means.
What is large cap?
Large cap refers to a company with a market capitalization value of more than $10 billion. Also referred to as “big cap,” large cap describes a class of popular stocks preferred by investors for their stability.
To calculate a company’s market capitalization value, multiply the number of outstanding shares by the share price of the stock. Market capitalization measures the depth of the company’s market.
When investors select their stocks, they must decide between risk and reward. Large-cap stocks usually belong to large, established companies and are safer investments than small- or mid-cap stocks.
Since large-cap companies are so large, they are less likely to encounter situations that force them to completely cease operations. However, due to their size, there is usually little room for explosive growth, resulting in smaller possible returns.
In contrast, small- and mid-cap companies are more likely to experience significant expansion that transforms them into the next Google or Apple. They have higher chances of becoming permanently insolvent.
Experts recommend that investors hold a mix of large-, small- and mid-cap stock to diversify their portfolios. Investors may choose individual large-cap stocks or mutual funds that consist of stock from multiple large cap companies.
Large cap example
Investors frequently add large cap stocks to their portfolio as a hedge against riskier investments. Some examples of large cap stocks include Apple, Amazon, Wal-Mart Stores, and Exxon Mobile.
The investing prospectus for the stock or mutual fund you are researching should state if a stock is large-, mid-, or small-cap. You also can check yourself by using the market capitalization value formula.
Assume that the company has 1,000,000 outstanding shares that are trading at $90 per share. Multiply 1,000,000 by $90 to get $90 million. Since this figure is less than $10 billion, this is not a large-cap company.
If another company has 63,000,000 outstanding shares trading at $200 per share, this yields a market capitalization value of $12.6 billion. This exceeds $10 billion, making this large-cap stock.
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