| Topic - The Large Caps | Education Center |
MARKET CAPITALIZATION -- or market value -- is a term you'll come across a lot, so we'll define it right here. It's the number of shares a company has outstanding in the market, multiplied by the share price. If a company had 5 million shares outstanding and each one traded for $5, its "market cap" would be $25 million.
As the name suggests, large-capitalization stocks are the biggest players in the market. How big? A market value of $5 billion is generally considered the low end, and behemoths like Microsoft and General Electric are pushing $400 billion at the high end. Taken together, stocks with market values over $5 billion account for 84% of the market's total $13 trillion in value.
These companies play an especially significant role in driving the economy. That's why everybody pays so much attention to them. The two most-watched indexes -- the Dow Jones Industrial Average and the Standard & Poor's 500-stock index -- are both composed of large-cap stocks. The Dow tracks 30 of the biggest stocks on the New York Stock Exchange. The S&P tracks 500 companies with an average market value of $7.85 billion.
The bigger you are, the harder it is to grow quickly, so large caps don't tend to expand as quickly as your average technology upstart. But what they lack in flash, they make up in heft. The classic "blue chip" has steady revenue, a consistent stream of earnings and a dividend. It also has critical mass, which means it can withstand ill economic winds better than its smaller cousins.
Happily, the 1990s have ushered in a new breed of large caps that grow much faster than most blue chips. We're talking about mature technology wonders like Microsoft, Intel and Cisco Systems. They're a little more volatile -- OK, sometimes a lot more volatile -- than a blue chip like Procter & Gamble. But when it comes to catching a piece of future economic growth, they're hard to beat.
(One caveat: Some small companies achieve large-capitalization status because of unbounded investor enthusiasm. Take Internet stock Yahoo!, which soared into the $5 billion range during 1998 despite puny earnings and revenue. Needless to say, there's nothing steady about a company like that.)
Risk/Reward
Because of their size and stability, large-cap stocks are not generally speculative in nature and appeal to a more
risk-averse investor. That's not to say they can't run into serious trouble, but they tend to grow along predictable trend
lines and, since they are well known to Wall Street analysts, their problems often come with ample warning. Big
companies (with the notable exception of many technology blue chips) also tend to pay regular dividends, which act as
ballast by attracting income-oriented, long-term investors. Don't be fooled: Large caps can experience jarring price
swings. But there's no doubt they are less volatile than small, hot-growth stocks.
Lower risk comes with a price, however. Except during periods of rampant uncertainty, large-cap stocks tend to produce lower returns than small caps (11% annually vs. 12.7%). But with the addition of the technology blue chips, some researchers think those statistics may be shifting in favor of the big guys. Still, many investors consider large caps their core holdings and augment their returns with a choice of fast-growth, higher-risk companies.