By Brian Hepp

When talking about investments, you often hear about some companies — or other investment vehicles, for that matter — referred to by interesting nicknames. While you may be familiar with the term “blue chips,” other terms such as “The Big Kahuna,” “The Big Fish” or the “Giants of Wall Street” have been used by some to describe the stocks of companies that are categorized as large cap. But what does this mean?

The word “cap” is short for a company’s capitalization, which is a measure by which we can classify a company’s financial size. Market cap refers to the value of a company, and it is found by taking the company’s current stock price and multiplying it by the total number of shares outstanding. The classification of companies into different caps can help investors to gauge their growth versus risk potential. The universe of publicly traded common stocks can usually be divided into three main categories, classified as “large-cap,” “mid-cap” and “small-cap,” stocks.

Historically, large-cap stocks have typically experienced slower growth with lower risk, while smaller caps have experienced higher growth potential, but with higher risk. That’s because it is easier to imagine a smaller company having greater potential to double its sales and/or profits in each of the next five years than it is to imagine an industry giant or conglomerate doing the same. Past performance is never a guarantee of future results, but speaking in general terms, these trends have held for many years. Keep in mind, an investment in stocks will fluctuate with market conditions and may be worth more or less than your original amount upon redemption.

To help us understand large caps a little better, let’s start by identifying a few common characteristics of these stocks. Generally, a company would be considered large cap when its market capitalization reaches a level of $10 billion or greater. As the name implies, these companies are also very large in size and scope. Generally, large-cap stocks represent the largest publicly traded companies that are oftentimes leaders in their respective industries. In addition, large-cap stocks are usually considered to be relatively stable because they represent investments in huge companies (bigger companies are typically expected to have less business risk than smaller companies), and generally, these stocks are also widely held by investors.

DOES SIZE MATTER?

In a word — yes. Different sized companies perform differently in the financial markets. Markets tend to move in cycles, sometimes favoring small caps versus large caps. b Because of their size, these companies can generally weather higher interest rates and a cooling economy better than small companies. Additionally, large-cap companies may have stronger cash flow and greater access to credit than small businesses. As a result, they often pay attractive dividends.

When you consider adding large caps to your portfolio, it’s important to remember that there are many other factors to consider, including your investment personality, your financial goals and objectives, and your personal risk tolerance. That being said, you may want to take a look at large caps to see how they may fit with your current investments.

Brian Hepp is a financial consultant for Santa Monica-based A.G. Edwards & Sons, Inc. Member SIPC. He can be reached at (310) 453-0077 or at brian.hepp@agedwards.com.