Just like every hierarchy model you will find three categories while investing in funds & this model helps people to make decisions in which category to invest i.e small cap stocks, large-cap stocks, and mid cap stocks. SEBI has many principles out there about these three categories and its reclassification states the changes that are incorporated in all investment funds.
When we make decisions and research everything, it is a must to look at the stock market to invest wisely. Based on different characteristics by categorizing companies in multiple hierarchies the market has eased the process of decision making for investment and you get to learn stock market easily without any hassle.
Important steps while you start to learn stock market
- Defining the tolerance level of your risk – As stocks are divided into three categories it also has a different level of risk. So, you have to choose how much risk tolerance you can take and then invest in the stocks that complement it.
- Decide your Investment goal – You can make it clear for yourself by asking what is your goal with the investment like is it buying a house, retirement fund, etc.
- Choose your Investing style – You can invest your money and forget it or you can be an active hand to manage your investments. Decide on an approach you think you are comfortable with.
- Reduce your Risk and learn to Diversify – You can reduce the risk that one investment’s performance can severely hurt the return by investing in a range of assets, or diversifying.
Understand large cap stocks
Investments that are made in large capitalized companies that are among the top 100 companies by stock market evaluation and market capitalization have large cap stocks. Companies with high reputations like HUL, Reliance, TATA, etc get more large-cap fund investments because of their reputation in the market as the public trust the brand plus it also has proven track records of medium to long-term performance with large cap stocks.
Points on why you should invest in a large cap stock
- Companies that come under the large cap are typically well-established ones with a long track record.
- The large cap companies are among the market leaders and have a long runway for their growth.
- Relative to other stocks in the market caps, you can easily liquidate your large cap stocks portfolio.
- Large cap funds are invested in different sectors that make room for diversifying the portfolio.
Risks in large cap stocks
- Market risk – External or Internal markets influenced by economic or geopolitical factors can create a risk of poor market performance.
- Credit risk – A risk taken by the investors when they cannot repay the principal amount or the interest due made by the issuer of the debt instrument.
- Interest risk rate – The price of the security can be moved in the opposite direction with rising interest rates and it totally depends on the availability of credit from the issuer along with the demand for it in the market.
While no other investments are considered safe, large cap stocks are relatively stable. Though there must be a lower chance of room for capital appreciation in these stocks they pay dividends regularly. Investors who are looking to have a stable portfolio can invest in large cap funds.