Different Types of Large Cap Stocks

What are large cap stocks?

Large-cap stocks represent companies worth $10 billion or more (measured in market capitalization). Common large-cap company names that may look familiar are Disney, Coca Cola, Tesla, & Walmart. These companies have a lot of influence over their industries and the overall market because they are the largest players.

Large-cap stocks can be broken into two types: growth and value. If we invest in any large-cap stock, they’re going to have different risks and returns because of the industries that they are within. Classifying stocks as either growth or value helps us determine why stocks behave differently and how much our portfolios should be invested in.

Growth

Growth stocks are companies that usually have the highest returns and the highest risk. Some common examples of growth stocks include Apple, Google, Disney, and Tesla. They experience severe market fluctuations because of three reasons.

1. Growing industries – Growth companies are in industries that experience rapid growth stemming from innovation and new technologies. They often provide solutions for the future and can lead many investors to invest in them, hoping for large future profitability.

The growth of these industries is largely funded by speculative money and risks that investors have available for them to take. Therefore, when the economy is doing well, there is more money to speculate, causing growth stocks to grow quickly. However, the reverse effect happens when the economy is contracting, and there is less investor money to speculate with.

2. No dividends– These companies also don’t pay profits to their shareholders as dividends; they reinvest profits to fuel more growth in the company, meaning more significant stock market returns.

3. Fear of missing out– A lot of these growth stocks trade above the value that the company is worth. Even though these are overvalued, investors continue to buy in with the belief that the uptrend will continue even though nothing about the company supports higher prices. This pushes prices higher and makes these stocks even more overvalued.

Because growth stocks carry higher risk and reward, you should limit your portfolio exposure based on your current investment strategy. Typically, the younger you are, the more exposure you’ll have to growth stocks because you’ll want higher returns and can take on more risk.

Value

Value stocks often offer lower returns, lower risk, and dividend income. Common examples include Johnson & Johnson, IBM, AT&T, and Ford. They have lower risk characteristics because of two reasons.

1. Mature Industries – Value companies are generally in industries that have been around for decades and have limited growth potential. Investors overlook these because value stocks provide stability rather than stock market returns.

 Unlike growth stocks, the industries that surround value stocks are dependent on non-discretionary funding, such as things that everyone needs. This makes them more stable when the economy contracts because businesses and consumers will still be spending dollars to maintain their standard of living. Industries include consumer staples, utilities, and energy.

2. Dividends – Because these companies don’t have much opportunity for growth, they incentivize investors to hold onto their stocks by paying out dividends to their shareholders.These dividends can look anywhere from __% to __%. These dividends rarely go down and consistently grow over time, providing a great source of income in retirement.

Value stocks are great for those looking for security and safety in their portfolios. Usually, the older you are, the less risk you want to have in your portfolios, meaning more exposure to value stocks and less to growth

Growth and value are essential when judging how much risk you want to take when investing in fundamentally different industries. But, another way we can separate large-cap stocks is by our exposure to companies within specific countries.

Domestic vs. International vs. Emerging Markets 

Country risk in investments refers to the level of uncertainty and potential financial losses associated with investing in a particular country’s stock market. Political stability, economic conditions, government policies, and regulatory environments within that country influence it. Investors need to consider country risk because unstable governments, economic crises, or unfavorable policies can lead to stock market volatility and decrease the value of investments.

Domestic – Domestic stocks are companies that operate within the same country as the investor, conducting their primary business activities and generating revenue within the nation. They are typically traded and priced in the local currency of the investor’s home country.

International – International stocks are companies based in foreign countries, offering investors exposure to markets outside their home country. These stocks can provide access to growth opportunities in international economies, but they also introduce currency risk due to fluctuations in exchange rates.

Emerging Markets – Emerging markets are economies in rapid industrialization and growth, typically characterized by lower income levels, evolving financial systems, and increasing access to global markets. Investing in emerging markets allows you to potentially make higher returns but with greater risk due to factors like political instability, underdeveloped regulatory environments, and currency volatility.

To manage country risk, investors often diversify their portfolios by spreading investments across various countries and industries. Make sure to do your research on a country’s political and economic stability because staying up to date on global events can help mitigate risks associated with investing in foreign stock markets.

Summary

Investors should look to invest in large cap stocks but with the risks in mind with doing so. It’s important for you to invest in growth or value stocks depending on your risk profile. It’s also just as important to diversify country risk through investing across different countries in different stages of growth.