Do you want to know the reason to stay with large-cap stocks?
Why you should always buy bluechip stocks in your portfolio?
Large-cap stocks are often bigger companies or top 30 or 100 companies with the highest market capitalization. At the time of posting this blog, Reliance is at the top with market capitalization of 9.83 lakh crores.
Top 5 companies by market capitalization are,
1) Reliance (9.83 lakhs)
2) TCS (7.70 lakhs)
3) HDFC Bank (6.97 lakhs)
4) HUL (4.40 lakhs)
5) HDFC (3.96 lakhs)
Reliance had crossed 10 lakh crore mark when the price of reliance share crossed 1574 in the last week. The value fluctuates based on the price movement of these companies. Till the last 2 years, TCS and Reliance will replace each other based on the price movement. After the launch of Jio, the share price moved higher and now it is clearly 2 lakh crore higher than TCS.
Why Market capitalization is significant?
Initially, the value of the company is defined by the auditors of the company. You would have started the company with the minimum capital or as much as you can. After that based on the transactions, the value of the company will increase or decrease.
Let us look this with an example,
Company Incorporated with capital – 10 lakhs
Initially Per share price of the company – 10
Total shares available – 1 lakh
After incorporation, the company will start its operation. Based on the competition, sales, revenue the balance sheet of the company will be computed.
Now again per share price of the company will be arrived at 25 in the first year.
This evaluation will be termed as Book value of the company when the company is getting listed in the stock market.
The share price may be listed on premium during the IPO (Initial public offer) based on the credentials of the company. The premium value of the company maybe 50 considering the future potentials.
Once listed, the premium price of the company needs to be justifiable. Else it will start decreasing. Now every quarter results will be analyzed and the price of the company will have movement.
This is how a company will move from start to getting listed in IPO.
Let us look at TCS as the IPO came in 2004. The launch price of TCS was 770-900 price band. 55,452,600 number of shares along with another 83 lakh shares was oversubscribed 10.3 times. 5420 crore IPO got listed with market capitalization of 47332 crores. Now the Market cap is at 7.70 lakh crores. The market cap of this company has grown more than 15 times. This company is able to grow consistently in the last 15 years when compared with its peers.
Your investments would have also grown significantly if you have sticked to this company as an investment.
One reason to stick to large-cap ;
Most of these companies will have proper management and vision for the next 5 years or so. This reflects in their growth strategy. Any minor issue will be taken care of by the company.
As we have seen about TCS, let us look at the biggest carmaker in India. Maruti has the biggest market share of more than 50% in the Indian car market. It has products in all segments as of now.
The price value of Maruti was at 1500 in 2013 and it has reached its peak of 10,000. From 11000 market capital in 2004 it has touched 2.19 lakh crores in 2019. The purchasing power of the people has grown significantly in these 15 years and this is reflected in the stock value of Maruti.
One reason to stick to the late cap is the market share of these companies. If you check out the top 10 companies by market cap, 4 are from Banking & financial services, 2 from the FMCG business, 2 from the software industry. India is aiming to be a 5 trillion dollar economy by 2025 and it requires most of these companies to move to the next level. If you are an avid investor or who wants to make good returns, you can stick with these companies for sure.
Source: money control
Though you need to do other fundamental analysis before investing, this is one reason to stick with large-cap companies.