When you invest in a large-company stock fund, you are buying shares of the largest and most established companies in the stock market. For a company to be considered large, it must have a market capitalization of at least $10 billion. These funds offer a safer and more stable investment compared with funds of smaller companies. In exchange, large-company funds don't have the same growth potential or ownership rights.
When a company has grown enough to become a large company, it has built up a solid market share. These companies have steady cash flow and don't see the same swings of smaller companies. This means large-company funds have more consistent income and are less likely to lose money. In addition, large-company funds pay out more dividends. When a company makes a profit, it can distribute the money to shareholders or reinvest it back in the company. Large companies are already well-established and don't need to keep as much money in the business. Therefore, they pay out a higher share of their profits as dividends.
The size of large companies means they make up a larger relative share of the stock market. This reduces their risk in a couple ways. First, there is more public information on large companies. More investors are discussing and publishing information on IBM than on a small, unknown tech start-up. This makes it easier to research your investment choices and avoid surprises. Large-cap stock funds are also easier to sell. More investors are willing to buy safe, well-known companies. If you want to sell the stock of a lesser-known company, you might struggle to find a buyer.
A downside of large-company stock funds is they have a lower average return than small company stock funds. Since large companies are already established and hold a big market share, they have less room to grow. New, smaller companies have more growth potential. Since 2010, small-company funds on average outperformed large-company funds. While you have less of a chance of losing money with large-company stock funds, you also won't see the same high growth as with small-company funds.
Less Ownership Power
When you buy stock in a company, you become a partial owner. This means you have some say in how your companies are run. Every year, each public company holds a shareholder's meeting to vote on key issues. Your relative influence is based on the percentage of shares you own. This benefit is a lot smaller for large-company stock funds. When you buy into a large-company stock fund, your investment is a drop in the bucket compared with the total number of investors in each company. You have less of an ownership influence on large-company stock funds than you do with smaller companies.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.