Do you know why you should invest in largecap stocks?
Largecap stocks also known as bluechip stocks are bigger companies or top 30 – 100 companies with highest market capitalisation. At the time of posting this blog, Reliance is at the top with market capitalisation of 9.83 lakh crores.
Top 5 companies by market capitalisation 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. In the last 2 years, TCS and Reliance had replaced each other based on the price movement. After the launch of Jio, share price moved higher. Now it is clearly 2 lakh crore higher than TCS.
Why Market capitalisation 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. 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 analysed and the price of the company will have movement.
This is how a company will move from start to getting listed in IPO.
Market share of TCS – An Example
Let us look at TCS as the IPO came in 2004. During the launch price of TCS is 770-900 price band. 55,452,600 number of shares along with another 83 lakh shares is oversubscribed by 10.3 times. 5420 crore IPO got listed with market capitalisation 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 in these years. If you have sticked to this company as an investment. Now TCS is one of the second best large cap stock in India.
Reason to invest in largecap stocks
Most large-cap companies will have proper management. Along with the vision for 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. 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. This is reflected in the stock value of Maruti.
One reason to stick to the large-cap stock 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. 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.
Though you need to do other fundamental analysis before investing. This is one reason to stick with largecap stocks or companies,
As of March 2020, the Stock market has corrected heavily. Simply on Account of coronavirus. If you check the stocks that have rebounded it is mostly Largecap stocks.