 Personal Finance PowerPoint Presentation Large Cap Big Cap Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Large Cap Big Cap, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chen, updated March 23, 2022. In prior presentations, we've been looking at investment goals, strategies, tools, keeping in mind the two major categories of investments. That being the fixed income, typically the bonds and the equities, typically the common stock. Also thinking about other tools we might use, such as mutual funds, such as ETFs, possibly helping us to diversify with less initial investment as opposed to investing in individual stocks and individual bonds. Keeping that in mind, we're asking, what does large cap big cap mean? Large cap, sometime called big cap, refers to a company with a market capitalization value of more than $10 billion. So this is going to be a way for us to think about and categorize the companies. That could help us also to think about and categorize our funds and possibly have funds that are going to be targeted towards small cap, mid cap, big cap, large cap type of funds. So large cap is a shortened version of the term large market capitalization. Market capitalization is a calculated by multiplying the number of a company's shares outstanding by its stock price per share. A company's stock is generally classified as large cap, mid cap, small cap, or micro cap. So when we're thinking about our investment strategies then, remember that we could invest in individual stocks and we might choose then or try to think about those stocks in terms of where they're classified, in terms of how large the company is. As one of the characteristics we're going to be comparing to, possibly comparing them to like companies, we might be investing in mutual funds in which case we might try to have say one mutual fund that tries to cover everything diversified across a wide variety or we might look to have a little bit more control by having multiple funds that are a bit more targeted. One way we can target a little bit more closely is to try to target by how large the company is by classification such as large cap, mid cap, small cap, and we can use certain indexes that the market uses to get an idea or feel of those different groups. Large cap, big cap, explained. Large cap stocks represent approximately 98.5% of the total U.S. equities market as measured by the Wilshire 5000 Total Market Index, which only includes companies with a minimum of $25 million float-adjusted market cap. As of April 30, 2021, the index has over 3,500 stocks representing the entire U.S. equity market universe. As of March 2021, the top U.S. stocks by market cap included the following. We've got number one, Apple, number two, Saudi RMCo, number three, Microsoft, number four, Amazon, number five, Alphabet, Google, and GOO Google, number six, Meta, M-E-T-A, formerly Facebook, number seven, Tencent, number eight, Tesla, number nine, Alibaba Group, number 10, Berkshire Hathaway. So those are probably many of them, if not all of them, familiar names. So those are going to be, of course, the big players. So when you're talking about the large cap stocks, you're looking at the big players, those are the ones that we would expect to be more stable over time. So when you're talking about the business cycle here in terms of our company cycle, we can think about smaller companies which are usually taking their money and they're reinvesting that money so that they can buy things like property, plants, and equipment at that point in time to facilitate further growth when they go into the stock market and ask to be on the stock market in a public exchange going public then in part often is for them to generate more capital, generate more money so that they can continue to grow and expand. Once a company gets quite large, then you would expect they're going to be somewhere up here. Now, a lot of these companies, you might be saying, hey, these people are still innovating, they're still doing new stuff, they're still growing, and that's true, but they're still growing, their growth in relation to how big they are means that they're probably not going to be as explosive as they were down here because clearly down here, they weren't as big. It's easier to double your size when you're not a mammoth to begin with, right? So you would expect that these ones might not be popping off as much growth, but you would expect them to still be marching along because they already have their infrastructure and everything built up and a lot of the things to these days has to do with the network. So when you think about things like Amazon and Google, they've already got their network established so they got kind of a monopoly of the network and so you would think they might be not putting as much stuff into back into the company but might be giving, say, dividends at that time once they get that large, for example. So globally, large cap companies are usually found in the market's leading benchmark indexes and the U.S., these indexes include the S&P 500, so these are some of the most well-known indexes, the Dow Jones Industrial Average and the Nasdaq Composite. So when you're looking at these indexes, these big guys, you're looking at the ones that are dominated by the big guys, right? And so since large cap stocks represent a significant portion of the U.S. equity market, they are often utilized as core portfolio investments. So notice that when you're looking at the stock market, you're looking at companies that are fairly large to begin with because they decided to go public and beyond public, basically, exchanges and because these companies are so large, they're going to have a large representation of the overall stock market. So characteristics often associated with large cap stocks include the following. Number one, transparent. Large cap companies are typically transparent, making it easy for investors to find and analyze public information about them. So one of the nice things about the U.S. exchanges is they allow you to kind of drill down on the information so that you have the information to make investment decisions. That's one of the great things about the market. So if everybody has enough information and everybody has the right information, true information, you would think that two people then with disinterested objectives having different or opposite objectives could make a market transaction. And so and obviously that's why in some ways it's more efficient than say an opaque like government entity or something like that. That's why we want government entities to be transparent as well. So in any case, number two, dividend payers, large cap stable established companies are often the companies investors choose for dividend income distributions. So these in our individual investment strategies are usually at the point in time that we're close to or in retirement. We probably want to be living on our nest egg at that point. So we might be investing in companies that are paying out a dividend as opposed to up and coming and growing companies which are likely not paying out the dividend because they're still trying to grow and putting that dividend back in the company to buy property plant and equipment. Their mature market establishment has allowed them to establish and commit to high dividend payout ratios. Number three, stable and impactful large cap stocks are typically blue chip companies at peak business cycle phases generating established and stable revenue and earnings. So they've got everything put together. They've got their business figured out. They've got the infrastructure in line and you would think they're fairly consistent then going forward. They tend to move with the market economy because of their size. They are also market leaders. They produce innovative solutions often with global market operations and market news about these companies is typically impactful to the broad market overall meaning they're so large that the moves that they make can have an impact on reverberate through the rest of the market. Whereas of course if you're a smaller company you're more subject to the whims of the markets what you do individually will not often be moving in the market. So market capitalization. Market capitalization describes the market size of a company. Market capitalization is an equity market segregation used broadly in the investment industry. A company's market capitalization is an important characteristic considered by investment companies and individual investors. Market capitalization is one characteristic of a company used in investment analysis. So there's many other characteristics. We can see what industry they're in and so on and so forth. But the largeness how big they are capitalization is a way to categorize. Market capitalization is usually used in conjunction with other stock characteristics such as price to earnings and earnings growth estimates. It is also an indicator of a company's market depth. Market capitalization is calculated by multiplying the number of shares outstanding by the share price of the company's stock. The number of share outstanding is reported on a quarterly basis. But the price of the stock can change from minute to minute because it's going to be dependent on the market as the market's moving. So therefore the market capitalization value is actively changing with the market price. For example, a company with 10 billion shares outstanding trading at $10 per share has a market capitalization of $100 billion. Likewise, a company with 10 billion shares outstanding and trading at a price of $1 also has a market capitalization of $100 billion. Publicly traded stock issuance is used as a capital raising mechanism for public traded companies. So that's why a lot of companies might go public because they're trying to generate capital through the issuance of equity through the issuance of the stock in that capital, that money that they get, then can be used to build things like property planting equipment, which hopefully if wisely invested will generate future revenue and increase stock prices. When a company chooses to offer its shares for trading on the open public market, it typically uses share issuance as its primary equity capital raising tool, meaning it's trying to get money that they could put into the company and build property planting equipment most likely to generate future revenue. Thus equity share management is a primary function used by well-established companies for capital and share outstanding are a part of that management process. Market capitalization categories. Typically stocks are lumped into three main categories of capitalization. We've got the large cap, we've got the mid cap, we've got the small cap. However, mega cap and micro cap stock segregations may also be used. Mega cap refers to stocks with a market cap of greater than $200 billion. Micro cap is less than $300 million. And nano cap may also be used for less than $50 million. So a large cap company has a market capitalization of over $10 billion and mid cap company has a market capitalization between $2 billion and $10 billion and a small cap company has less than $2 billion in market capitalization. Large cap companies usually have a broader market issuance experience with greater access to the capital markets. Usually large caps have the greatest trading liquidity. Investing in large cap stocks. Investors like to diversify their portfolio by investing in companies in different industries with varying market caps, revenues, and earning growth projections. So clearly we want to diversify typically as the individual investor. Due to their size, large cap stocks are generally believed to be safer. So clearly if they're marching along and they're that large you would think that they're going to be less risky typically. While they do not offer the same growth opportunities as emerging mid cap and small cap companies large cap companies are innovative market leaders. So and even if they're not innovative, they're probably going to be pushing the market no matter what they do because they're that large or some of them are. So as a result, their stock price can gain significantly through specific market initiatives or around groundbreaking market solutions. Typically investing in large cap companies is used as a core long term investment strategy within a portfolio because of their stability and dividends. So financial advisors usually suggest diversifying an investment portfolio by including small cap, mid cap, and large cap stocks. Allocations and investment decisions are typically based on risk tolerance and investment horizons. So we've talked about in the past that generally if you have a longer investment horizon possibly saving for retirement then you might have more weight. If you're just looking at these three categories as your categorization you might have a little bit more weight on the small cap to the to the mid cap size of things because if there's a swing in the market because these are more volatile it should still be okay it should play itself out in a longer time horizon. If you have a shorter time horizon you're coming up to your goal like retirement then you probably want more on the large cap and if you're in retirement you almost certainly want more on the large cap because then you don't want the volatility of the small cap and the mid cap because if they go down you don't have any time horizon for that to play out. So if you just hit a lump in the cycle that wouldn't be good. Large caps are typically more stable and if you're living on the dividends then you're going to want the large cap typically because those are the ones that pay them.