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 and the Nasdaq. The S&P tracks 500 companies with a mean market value of $16.2 billion.
The bigger you are, the harder it is to grow quickly, so large caps don't tend to expand as fast as your average upstart. But what they lack in flash, they make up in size. 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 hard times better than its smaller cousins.
That said, the 1990s ushered in a new breed of large caps that grow much faster than most blue chips. We're talking about mature technology companies like Microsoft, Intel and Cisco Systems. Companies like these are going to be a little more volatile -- OK, sometimes a lot more volatile -- than a blue chip like Wal-Mart. But this means that during times of economic growth they may have more upside potential. Of course, as we saw in 2000, 2001 and 2002, when the economy is on less-sure footing, they can also suffer significant losses.
This type of company is not to be confused, however, with smaller ones that achieve large-capitalization status based purely on investor enthusiasm. Back during the Internet heyday, many young start-ups achieved large-cap status well before they had earned it. In April 1999, for example, the Web-based travel company Priceline.com was valued at more than $23 billion. Then the stock -- along with those of many of its Internet brethren -- tanked. As of the start of 2003, its market capitalization had shrunk down to a $297 million. Lesson learned? Some companies might look like large-caps, when they're really just bloated small or midcaps. And clearly, there's nothing remotely steady about companies like these.
Risk/Reward
Because of their size and stability, true 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 attract 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 (9.34% annually vs. 9.71%). 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.
