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.
- Thinkstock Images/Comstock/Getty Images
- Market Capitalization & Large Cap Vs. Small Cap
- How to Buy Minimum/Small Amounts of Stock
- Common Stock Funds
- Disadvantages of Blue Chip Shares
- Can I Get Started in a Mutual Fund for $25 Per Month?
- Nonproprietary Vs. Proprietary Mutual Fund
- The Determinants of Mutual Fund Performance
- What Is the Difference Between a Diversified & Non-Diversified Mutual Fund?