INVESTING TERMS
What is
LARGE
Large cap refers to a company with a market capitalization value of more than $10 billion. Also referred to as “big cap,” large cap describes a class of popular stocks preferred by investors for their stability.
Deeper definition
When investors select their stocks, they must decide between risk and reward. Large-cap stocks usually belong to large, established companies and are safer investments than small- or mid-cap stocks.
Large cap example
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Experts recommend that investors hold a mix of large-, small- and mid-cap stock to diversify their portfolios. Investors may choose individual large-cap stocks or mutual funds that consist of stock from multiple large cap companies.
CAP?
Since large-cap companies are so large, they are less likely to encounter situations that force them to
completely cease operations.
However, due to their size,
there is usually little room for
explosive growth, resulting in
smaller possible returns.
SHORT-TERM
CAPITAL GAINS
Profits made from selling assets owned for one year or less.
LONG-TERM
CAPITAL GAINS
Profits made from selling assets owned for more than one year.
Jeff bought a vacation home for $100,000 and used it as a rental property for five years before selling it for $150,000, giving him a capital gain of $50,000.
Since he owned the property for more than one year, he calculated his long-term capital gain based on his tax bracket.
Since his annual income placed him in the 15 percent tax bracket ($37,651 to $91,150 for a single person in 2016), he didn’t have to pay any taxes on the profit.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
EBITDA doesn’t need to be measured by the Securities and Exchange Commission’s accounting standards, the Generally Accepted Accounting Principles (GAAP), so it is not a required line item on a company’s financial statement. EBITDA has become much more common in recent years, although many firms list an adjusted EBITDA figure.
Investors frequently add large cap stocks to their portfolio as a hedge against riskier investments. Some examples of large cap stocks include Apple, Amazon, Wal-Mart Stores, and Exxon Mobile.
The investing prospectus for the stock or mutual fund you are researching should state if a stock is large-, mid-, or small-cap. You also can check yourself by using the market capitalization value formula.
Assume that the company has 1,000,000 outstanding shares that are trading at $90 per share. Multiply 1,000,000 by $90 to get $90 million. Since this figure is less than $10 billion, this is not a large-cap company.
Before the proliferation of
inexpensive computer
technology, it had been very
difficult to create and price
complicated derivative contracts, but this problem was more or less solved by the 1990s, thanks also to the Black-Scholes equation. Mortgage-backed securities became very common investment products. Instead of using derivatives to effectively balance risk, institutional traders began buying them up as ways to create leverage and take on much more risk. When the U.S. housing market began to crumble in 2006 and 2007, MBS investments spread throughout the banking system began to rapidly lose value, precipitating the crisis.
MARKET CAP
VALUE
OUTSTANDING SHARES
SHARE PRICE
OF THE STOCK
In contrast, small- and mid-cap companies are more likely to experience significant expansion that transforms them into the next Google or Apple. They have higher chances of becoming permanently insolvent.
The measure can be calculated by taking a company’s net income and adding back interest expense, taxes, depreciation, and amortization. Alternatively, it can be calculated by taking a company’s operating profit — EBIT, or earnings before interest and taxes — and adding depreciation and amortization.
Susan opens a credit card with a $1,000 credit limit and an interest rate of 14.99.
She makes a purchase of $200.
Susan understands she will pay interest on the balance until she pays it off, but she decides to carry a revolving balance.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
If another company has 63,000,000 outstanding shares trading at $200 per share, this yields a market capitalization value of $12.6 billion. This exceeds $10 billion, making this large-cap stock.
$100 million
1,000,000
$20 million
$10 million
– Minus
OUTSTANDING SHARES
EXPENSES
Equals =
$30 million
NET PROFIT
>$10B
To calculate a company’s market capitalization value, multiply the number of outstanding shares by the share price of the stock. Market capitalization measures the depth of the company’s market.
$90
=
$10 Billion
PRICE/SHARE
MARKET CAP VALUE
NOT A LARGE CAP COMPANY
OUTSTANDING SHARES
PRICE/SHARE
MARKET CAP VALUE
A LARGE CAP COMPANY
=
63,000,000
$200
$12.6 Billion
