Investor Toolkit: Balance small and large cap stocks in your portfolio

large cap stocks

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you our specific advice on the fundamentals of successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “The quality of a stock matters more than its size.”

Shares of large, well-established companies generally rebounded well after the 2007-2009 market crisis. Investors sometimes refer to these companies as “large cap stocks.” That’s because they have a market “cap” (that’s short for “capitalization,” or total value of shares outstanding) of several billion dollars or more.

Some investors now wonder whetherlarge caps will continue to outperform. They wonder if they should sell their large cap stocks and instead buy more “small caps.” These are smaller companies with a market capitalization below some arbitrary figure, such as $1 billion.

  • Look beyond market cap to judge a company’s investment quality. Large cap stocks can be leaders in giant fields with expanding potential. Or they can be wounded behemoths in declining fields. The investment quality of small caps varies even more. They range from near-worthless promotional issues to leaders in small but fast-growing fields.

    To tell good companies from bad, you have to look at a variety of factors much subtler than market cap. They include earnings, dividends, the strength of the corporate balance sheet, the strength of the company’s products, customer loyalty or fickleness, and so on.

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  • A large cap stock may have a high or low price per share. Remember, a company’s market cap is equal to the total number of shares outstanding multiplied by the price per share. However, a largecap stock can have a low price per share if it has many shares outstanding.

Investment opinion: To succeed in today’s highly volatile markets, you’ll need to own shares in a variety of companies of varying sizes. But here’s one thing your best choices will have in common: each will be about the right size to succeed in the business it is in.

You can get our investing advice, plus buy/sell/hold advice on stocks you may be considering buying, in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.

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