Is Trading Large Cap Stocks a Waste of Time?

Submitted by Sharemarket News on 5 May, 2011 - 14:04

Learn about trading large and small caps.

Market capitalisation is calculated by multiplying a company's shares outstanding by stock price per share. Large cap (capitalisation) companies are the big boys of the Australian Securities Exchange. Blue chip companies like BHP Billiton, Macquarie Group and Telstra have market capitalisations that are usually more than $10 billion.

Large caps share trading is usually associated with lower risk and stability, but of course there are exceptions like Enron. The higher you are, the harder the fall. Remember that large-, mid- and small cap distinctions among stocks are not absolutes. These distinctions change over time.

Small caps have potential for higher profit rewards and have generated promising returns in recent years, but the risks are also greater. Because quick money can be made on small caps with little capital, small cap trading is a common lure and a subconscious impetus. The challenge with the pennies is to prepare early for surprise exponential movement and exit when the possibilities are exhausted.

If you play the small caps widely enough, you are likely to have fewer capital losses on singular investments. However, you can also enjoy great risk/reward and smoother equity curves with leveraged products on the blue chips. Applying basic trading rules like using tight stops will help ease your trading anxiety.

Regardless of size, indices are subject to the same influences that affect market movement, which means that small and large caps move either way. A diversified stock portfolio containing a mix of the micro to the large caps is the most logical decision. Weighing risks versus reward should help you move in the right direction.