When it comes to stocks, size matters.
As a trader, I focus on low-priced stocks because of their high volatility. However, this style of trading isn’t for everyone: Many traders prefer to take longer positions with more stable large-cap stocks.
Large-cap stocks are offered by big, established companies. While the share price may not move as sharply as a stock offered by a smaller company, there’s often plenty of room for growth – if you know what to look for.
Large-cap stocks offer traders the opportunity to benefit from the continued growth of industry leaders. In this post, you’ll learn all about large-cap stocks, including what they are, how to identify them, and the pros and cons of trading them.
Table of Contents
- 1 What Are Large-Cap Stocks?
- 2 How To Find and Trade Large-Cap Stocks in The Stock Market
- 3 Examples of Great Large-cap Stocks
- 4 Benefits of Trading Large-Cap Stocks
- 5 Tips on How to Trade Large-Cap Stocks
- 6 The Bottom Line
What Are Large-Cap Stocks?
Before defining large-cap stocks, let’s clarify what “cap” means. When we start talking about caps in the financial realm, we’re talking about the market cap, or market capitalization.
Every trader should have an understanding of market cap because it’s an extremely important marker of a given stock.
Market capitalization is the total market value of a company’s shares outstanding. It’s designated in a dollar amount.
While you could (and should) look at a company’s sales and assets, the market cap gives you a different way to look at the size and scale of a company.
Good news: It’s ridiculously easy to figure out a company’s market cap. It’s determined by multiplying the total number of shares a company has by the current price per share.
So, for example, say Company X has 1 million shares, which are being sold at $50 each. That company has a market cap of $50 million. There are market cap calculators that you can find online, but come on. That’s easy.
With the market cap number determined, you have a figure that can help you target your research and technical and fundamental analysis efforts to be most effective.
Figuring out the market cap helps you narrow down stocks of interest. For example, you might create a watchlist completely comprised of companies with similar market cap sizes.
Choosing stocks with different market cap sizes can help add diversification to your portfolio, too.
All right. Now that you know what market cap means, what does it mean to be a large-cap stock?
Once you’ve determined the market cap, the number you come up with will put the company in a variety of different size categories, ranging from nano- or micro-cap (these would be low priced stocks/smaller companies) to small-, mid-, large, and mega-cap companies.
While there isn’t an official delineation of the number that makes a stock fit into one category versus another, a large-cap company would typically be considered one that has a market cap between $10 and $200 billion with the market cap formula.
Yep, those are big numbers. That’s because these are big, established companies. Often, they’ve been around for a long time, or are in a major industry.
For example, General Electric, with a market cap of about $63 billion at the time of this writing, would be considered a large-cap stock.
Small Cap vs. Large Cap
What’s the difference between small and large cap? Here’s the 411:
Size. You’ve probably already figured out that a small cap company is not as big as a large-cap company. But how big is the difference?
A large-cap company has a market cap between $10 and $200 billion. In comparison, a small-cap company falls between $300 million and $2 billion. That’s still pretty big, but tiny in comparison to the large-cap company.
Perceived value. If you’ve heard the term “blue chip stock,” large-cap stocks will often fall into this stock type category.
The term “blue chip” is actually inspired by the game of poker, where blue chips have big value. Blue-chip stocks are generally perceived as highly valuable stocks, which are prized for their ability to deliver long-term value.
They’re considered stable and secure. True, nothing is ever a sure thing in business or the market. But it usually takes a significant event to really make a big change in the stock price.
On the other hand, small-cap companies don’t always have the same perceived value because they’re not as established, well known, or trusted. They might be newer companies, or they might be in up-and-coming industries. They don’t have a proven track record yet.
Risk level. There can be a big difference in the volatility of small- versus large-cap stocks.
In general, the higher the volatility, the bigger the risk. Small-cap stocks are usually a lot more volatile than large-cap stocks. These spikes in price mean you can potentially earn big profits, but it also means that you could easily experience big losses.
Because large-cap stocks have much lower volatility, you don’t have as much risk associated with rapid price movement.
Historical data. Though it’s not always the case, small-cap companies are usually younger than large-cap companies. This means that there’s less company history and therefore less data to evaluate when performing fundamental and technical analysis.
With a small-cap stock, might be looking through a year or two few years’ worth of earnings versus the decades of data available with many large-cap stocks.
When to buy. Small- and large-cap stocks both perform differently at different times of year.
When the new year starts, there’s plenty of optimism in the market. Traders are ready to go for the hottest new stocks unlike any other time of the year.
However, as the year progresses, small-cap stocks can go on the decline. In later quarters, traders are eager to cut losses which more frequently occur with small-cap stocks, and are more likely to hold positions in the more “sure thing” large-cap stocks.
There’s even a term for this phenomenon: the January Effect, which refers to the massive sell-off in December followed by lots of optimistic buying in January.
How To Find and Trade Large-Cap Stocks in The Stock Market
Looking for large-cap growth stocks but not sure where to get started? These tips will point you in the right direction.
#1 Large-Cap Stock Indicators
Stock indicators are the perfect way to kick off your search for large-cap stocks.
Most trading platforms will allow you to filter on various criteria. Yes, you can filter by market cap size, but that won’t tell you if a trade is a good idea. You need a little bit more information.
So, for instance, you might consider starting by searching for the biggest percent gainers for the day, and then filtering the results by market cap size.
From there, you can look at other indicators like the PVT (price volume trend) indicator, which helps you determine volume. Volume is important because you want enough shares in movement so that it will be easy to enter and exit a position.
#2 News Catalysts
Now that you’ve identified a few contenders for large-cap stocks to trade based on your indicators, it’s time to start digging and doing a little research.
Start looking around at what is making these stocks move, and why. Are there any big news catalysts that you can identify? For instance, was there an earnings report just released, or did the company just announce a merger or a hot new product?
High volume plus a news catalyst is a great combo when it comes to finding stocks to trade. If the shares are moving at a rate that makes a trade easy to enter and exit and it seems like something promising is on the horizon that could affect the price, it may be the right time to hop in and buy.
News catalysts can be an invitation to dig deeper in terms of fundamental research, too. It can help you determine if the news has merit. In looking at the financials of the company and their success rate in the past, you can better gauge their success in the future.
#3 Stock Chart Patterns
If you want to make calculated, intelligent trades, you’ve got to get wise about technical analysis.
Technical analysis is where you carefully review charts to see if there are any noticeable patterns in the stock price.
I love patterns. Students in my Trading Challenge know this, and it’s one of the pillars of my teaching. I call myself a glorified history teacher because I’m all about mapping out the past in hopes of predicting what could happen in the future.
You can never know exactly what will happen, of course. But if a stock has shown the same pattern over and over in the past, the chances are higher than not that it will follow a similar trajectory in the future.
Looking at stock chart patterns will help you determine if it’s a good time to buy a large-cap stock, and help you figure out appropriate entry and exit points.
This is a great skill to develop overall because it can be used for all trades, whether it’s a large-cap, small-cap, or a penny stock.
#4 Trading Plan
Repeat after me: You must have a trading plan. Every. Single. Time.
Plenty of traders don’t think that having a trading plan is important, or they think it’s fine to keep it all in their head. WRONG.
A trading plan is key in helping you map out your trade and stick to it.
The simple act of making a trading plan forces you to think about what you hope to gain from a trade. It also forces you to think about what could go wrong in a trade.
This is extremely valuable because it makes you think about when you might want to enter a trade, and at what point you’ll cut your losses.
In the heat of a trade, it can be easy to adopt a “hold and hope” mentality or to make bad decisions. Your trading plan will keep you on track.
#5 Stock Screener
Indicators? Technical analysis? Filters? If you’re new to trading and wondering where you can find these resources, the answer is simple: You need a great trading platform so that you can screen stocks.
The key is to choose a platform that has plenty of tools to help you do the stock research you need.
A great platform will allow you to filter down stocks to choose from. From there, you can delve into fundamental and technical data to make a more informed decision.
Many will also link to relevant news articles which can give you insight to potential catalysts.
A trading platform like StocksToTrade is key for performing all of the due diligence detailed in this post.
Examples of Great Large-cap Stocks
Now that you understand how to find large-cap stocks, how can you determine which ones might be right for you? Here, I’ll over some large-cap stock examples that offer growth potential.
#1 Apple (AAPL)
Plenty of traders think that it’s too late to profit from Apple stock. However, instead of lamenting the fact that you didn’t buy shares before the iPhone was introduced, consider what the company could offer in the future.
Apple is undoubtedly a large-cap stock and an established company, but the question of whether or not Apple is a growth stock remains the subject of some debate.
Right now, iPhone sales are down, and they’re up against a pending monopoly lawsuit. Both of these things have brought down the price of the stock. This means that it’s available at a good price, but does that mean you should buy?
In taking a longer view of the stock, you’ll see that in spite of the negative catalysts, overall earning are great, the company is highly valued. Only you can answer whether or not it’s a worthy trade for you, but there are factors that make it a compelling large-cap stock.
#2 Facebook (FB)
Facebook is a massive company, but that doesn’t mean that it doesn’t still have room to grow.
Following a weak second quarter, Facebook’s stock price took a dive earlier this year. Among investor fears? Concern that increased spending in the future will make the stock decrease in value. However, this massive sell-off may have been short-sighted.
Overall, Facebook is still on the up, as the average revenue generated per user is increasing, and it has continued to acquire social tools to expand its offerings.
Yes, the spending may continue to rise, but so will potential areas for expansion for the company. With more and more users joining each quarter, it still has plenty of potential for future growth.
#3 Amazon (AMZN)
Many traders don’t even consider trading Amazon stock, because they figure it’s already peaked. Not so fast!
Amazon didn’t become an industry leader by accident, and they’re certainly not resting on their laurels. In this year alone, the company’s revenue has grown 39%. That’s impressive for a company of any size, but pretty amazing considering the size of Amazon.
They continue to innovate and offer new services and products, so there are plenty of different ways in which the company can continue to grow. This makes it a large-cap growth stock worth checking out.
Benefits of Trading Large-Cap Stocks
I’ve alluded to some of the pros of trading large-cap stocks, but let’s just review …
Plenty of analyst coverage. Because there are a lot of eyes on these industry leaders, they get plenty of attention in the press and from analysts.
Analysts will devote a lot of time and effort to researching stocks like Apple or Amazon. including whether it’s rated buy, hold or sell, and recommendations and suggestions.
You can benefit from their research and opinions, using it in addition to your own research to determine if the trade is worthwhile.
Slow but steady growth. What’s your risk tolerance? Not everyone has the stomach for trading small-cap stocks, which tend to be more volatile.
If this sounds like you, larger-cap stocks may be a better alternative. While this isn’t an absolute statement, they tend for the most part to offer more steady and reliable growth.
It can take a longer amount of time, but you’re less likely to experience the emotional ups and downs that can come with a smaller cap stock that may be spiking in either direction in big percentages in sometimes very short time frames.
Lots of data. Large-cap companies are highly accountable in terms of filing earnings reports, and as such, there’s plenty of company data readily available in the public sphere.
Usually, these are companies that have been around for a while, so you could conceivably have decades worth of financial and technical data to sort through.
This can help you identify long-term trends and stock movement over time. If you see the same pattern repeating itself for years and years in a row, for instance, it’s even more likely that it will continue to repeat.
Dividends. Many large-cap stocks offer dividends as an added perk to shareholders.
What’s a dividend? It’s a payment that’s issued by a company to shareholders, usually (but not always) on a quarterly basis. The dividends might be issued as cash dividends or stock dividends.
These dividends can be used to reinvest more funds in the same company, which means you can enjoy larger dividends as time goes on.
Room for growth. Remember, these large-cap companies didn’t become industry leaders without good reason.
Typically, they are able to continue to lead and innovate, and in the case of stocks like the ones detailed above, there can still be room for growth.
Disadvantages of Large-Cap Stocks
Every rose has its thorn. Here are some of the potential disadvantages of large-cap stocks:
Higher prices. If you’re trading with a small account, one of the biggest disadvantages of large-cap stocks is the price point.
For example, at the time of this writing, Facebook stock is currently about $140 per share, Apple is in the low $170s, and Amazon is about $1,700.
Slower account growth. Slow but steady may win the race, but it won’t grow your account fast. Typically, large-cap stocks are better as longer-term investments, as opposed to small-cap stocks, which can grow exponentially and can offer a greater return in a short period of time.
However, small-cap stocks come with a greater level of risk, so there’s always a tradeoff.
Competition. large-cap stocks are offered by companies that are better known, so there’s going to be a lot more competition from institutional investors.
With low-priced stocks, which are less interesting to bigger investors, there tend to be more opportunities for traders with small accounts. This shouldn’t rule out the possibility of large-cap stocks, but it should be taken into consideration.
Tips on How to Trade Large-Cap Stocks
Here are some additional thoughts on best practices for trading large-cap stocks.
Create Your Own Growth Stock Watchlist
If you want to make the most tactical trades possible, create a large-cap stocks watchlist.
A watchlist is an important tool for traders at any level. With large-cap stocks, it can help you identify which ones have the most growth potential.
The watchlist is your narrowed-down list of stocks that you’re considering for trades. You don’t want it to be huge, as it’s a shortlist of contenders.
You can think of it like a list of nominees for an Academy Award. These are just the best of the best, narrowed down from all of the choices out there.
This is the list that you’ll watch to see if any of the stocks meet your specific criteria to enter a trade.
Ideally, you’ll have created a basic trading plan for each of the stocks on your watchlist, including entry and exit points. This means that if any of them meet your criteria, you’ll be ready to pounce on the trade.
I’m a huge fan of watchlists, as my students know–I send them out frequently to my students so they can see what I’m noticing in the market and what I’m looking at. BTW, if you want to check out my watchlist every Sunday, right here — there’s no cost; you just sign up with your email address.
Set Stop Losses
Because large-cap stocks tend to be steadier and more reliable, many traders don’t think that it’s necessary to set stop losses.
Hey, remember the Titanic? People thought it was too big to possibly sink, but they were wrong.
That might be a dramatic example, but the fact is that even big companies can fail, and the stock prices can tank. Because of this, you’ve got to be careful about the possibility of loss, no matter how established the company is or how long it’s been around.
It’s important to cut your losses quickly with stocks of any size, so always set a stop loss. Maybe it’s a mental stop, or maybe it’s an actual stop-loss order. But make it part of your plan to determine at what point you will cut losses if things start going not your way.
Never Stop Learning
What if I told you there was one thing that you could do as a trader that will make you better at trading large-cap stocks, small-cap stocks, and everything in between?
It’s as simple as this: Never stop learning.
Knowledge is power in the stock market, and it will make you perform better in the market in the long run. I can’t promise that you will make or lose money on any trade. But I can promise that investing in knowledge is always a good decision.
My Trading Challenge was created because traders kept asking me how I did it, and they wanted to learn from my techniques.
When I started my trading career, the resources out there were woefully lacking. This means I had to learn how to trade the hard way — through trial and error. Accent on the error.
I became a millionaire, but it required a huge amount of study, effort, and figuring out things the hard way.
Now, I want to pass on what I have learned to my students, so they don’t have to suffer the same mistakes I did.
The Bottom Line
Large-cap stocks can provide many opportunities for traders.
Offered by established companies and offering steadier and more reliable growth, large-cap stocks can be enticing for traders, especially if they don’t have a huge risk tolerance.
However, the higher price and potentially slower movement can make them more of a long-term strategy.
Long thought of as too slow-moving to have an impact on an account, there are plenty of opportunities for growth that don’t need to take years and years if you’re able to do the right research and identify the right opportunities.
Have you traded large-cap stocks? Are you a fan of them, or not so much? Share your comments and let me know!