Mega cap or megacap is a term that describes the largest publicly-traded companies, based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands
Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks.
Like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.
Market Capitalization, Explained
Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.
For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.
Most often, companies are assigned to one of three categories, based on their market capitalization as follows:
• Small cap: Market value of $250 million to $2 billion
• Mid cap: Market value of $2 billion to $10 billion
• Large cap: Market value above $10 billion
While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.
Mega Cap Stock Definition
Mega Cap stocks have a market capitalization that’s significantly beyond $10 billion required for classification of large cap stocks. Instead, these companies have market capitalizations of $1 trillion or more.
WIth a market cap of more than $2 trillion, Apple has the largest market cap in the world, followed by Microsoft, Amazon, and Google parent company Alphabet. While the stocks with the absolute biggest market cap are all tech companies, there are also mega cap stocks in other industries such as healthcare or consumer goods.
Mega Cap Stock Pros
There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.
Diversification
Investing across different sectors and market capitalizations spread out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.
Stability
Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.
Dividends
Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.
Mega Cap Stock Cons
While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:
Limited upside
Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.
Perception vs. reality
Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.
How to Invest in Mega Caps
If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.
Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies.
Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.
ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.
The Takeaway
Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.
If you’re interested in adding mega cap companies to your asset allocation, consider getting started with SoFi Invest online brokerage. You can use fractional share trading, to buy a stake in some of the market’s largest companies starting with as little as $5, or you can purchase ETFs for broader exposure.
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