Most investors understand the importance of diversification through the allocation of assets within a portfolio, which aims to balance the trade-off between risk and reward between stocks, debt and cash. However, as part of stocks or stocks within a portfolio, investors have a wide range of investment options, each with different characteristics, advantages and disadvantages. Some of the most common Google searches you will find will be terms like “how to buy netflix stocks‘, or similar queries on how to invest money in the biggest and most famous brands. It’s worth checking out if these investments are worth it in the first place, and what the pros and cons of putting your money into established brands are.
The biggest benefit of adding large cap stocks to an investment portfolio is the stability they can offer. Because large cap companies are so large and have a well-established reputation with consumers, they are less likely to encounter a business or economic situation that renders them insolvent or forces them to shut down their income-generating activities altogether. Companies considered to be small or mid-cap do not have the same level of stability and therefore present a higher degree of risk than large-cap investments.
Another advantage of investing in large cap companies is the possibility of regular dividend payments. Large cap stock prices are generally not predicted for high growth rates over time because they are already well established in the market. This can create a stagnant stock price and little or no capital appreciation for investors. However, despite the lack of rapid growth in stock prices, large-cap companies often pay dividends to compensate shareholders. These dividends can lead to impressive full returns for large cap investors when added to the calculation of performance over time. Large-cap stocks that pay regular dividends are common among income investors or those seeking income through relatively conservative investments.
Since large-cap companies often have a long lifespan, investors and creditors can easily get research into the operations and profitability levels of the business. Large-cap, publicly-traded companies are required to provide shareholders and potential investors with accurate and periodic financial statements, making it easier to determine whether a company is worth the investment. In addition to research, company history and financial statements can be used in combination with current business activity to determine an accurate valuation. These aspects play an important role in understanding the risk and potential reward of investing in a large cap company. Large-cap investments can be purchased as individual stocks; through an exchange-traded fund, or ETF, which tracks a large-cap benchmark; or through one of the hundreds of mutual funds available focused on large cap investments.
Small businesses also have advantages. They can add diversification benefits to traditional portfolios which tend to be market capitalization weighted (they invest more in large cap stocks to better represent their share of the market).
Small businesses have more room to grow; an investment that a small business makes can double its income. Meanwhile, that same investment by a bigger company may not make a noticeable difference.
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