What Are Mega Cap Stocks?

Mega cap stocks are shares of the largest companies in the investing world, generally defined as those businesses with market capitalizations of more than $200 billion. At the other end of the spectrum, small cap companies are generally valued between $300 million and $2 billion. Medium cap, or mid cap, companies have a market value up to $10 billion, and large cap companies have a market value of $10 billion or more. 

Knowing a company’s market cap allows investors to compare and rank companies by size, and to gauge the performance of a stock or portfolio against an index of companies with a comparable range of market caps—a process called benchmarking. Stocks with the highest market caps are mainly tech companies, such as Apple, Amazon, and Microsoft, but there are also mega cap stocks in other industries such as health care, consumer goods and energy.

What are mega cap stocks?

Mega cap is a designation for the largest companies in the investment world, measured by their market capitalization. Market cap is calculated by multiplying the company’s total number of shares outstanding by its current share price. That means that a company’s exact value may change with market conditions. As of mid-2022, more than 40 companies in the world had reached mega cap status. 

Many of these companies have globally recognized brands and tend to have stable revenue, earnings, and, in some cases, dividends. Mega cap stocks are generally considered safer investments than their smaller counterparts because the companies are more established, but they may not have the same returns or growth potential.

Investing in mega cap stocks

Investors can buy mega cap stocks as individual shares of stock, or they can put money into an investment fund that holds these stocks. Mutual funds, index funds, and exchange-traded funds (ETFs) may buy mega cap stocks or track a mega cap index. The CRSP U.S. Mega Cap Index, for example, is an index that replicates the performance of the largest U.S. companies. 

Investors who want a more hands-on approach may choose which individual stocks they want to buy. While this method allows for more control, it also means the investor has the responsibility of performing the necessary research on individual companies. 

Investing in a fund that holds or tracks mega cap stocks is the route most individual investors take. Investors could research ETFs and mutual funds that hold mega cap stocks, choose a fund, and buy shares in it. The investor would immediately gain exposure to multiple securities, including mega cap stocks. 

Some investors prefer ETFs because they can be quickly traded on a stock exchange, which offers liquidity. They tend to have little turnover in the basket of securities they hold, which makes them more tax-efficient compared to many mutual funds. Additionally, investors can compare expense ratios, or how much the fund manager charges as a percentage of the assets in the fund, and choose a fund that’s low-cost.

6 examples of mega cap stocks

Mega cap stocks include some of the most recognizable companies. While shares of most mega cap stocks fell during the first half of 2022 when the stock market entered a bear market, many maintained their status as mega cap. Some also saw a rise in revenue during this time. Some of the best-known mega cap stocks include:

• Apple (AAPL):

  In 2018, Apple was the first U.S. exchange-listed company to reach a $1 trillion market capitalization. As of early September 2022, it had a market cap of about $2.5 trillion and was the largest public company in the world. Although Apple’s stock price fell by about 23% in the first half of 2022, the decline was smaller than for several other tech giants. Despite the slide in stock price, Apple posted record revenue of $83 billion in the fiscal third quarter ended in June 2022.  

• Pfizer (PFE):

  Pfizer, a global pharmaceutical company and the biggest maker of COVID-19 vaccines, had a market cap of about $258 billion as of early September 2022. In the first half of 2022, Pfizer’s shares fell about 11%, about half the decline of the broader market, while revenuerose 60% to $53 billion. 

• Merck (MRK):

  Merck is one of the largest drugmakers in the world and had a market cap of about $220 billion as of mid-2022, a period when the shares rose almost 21%, far outpacing the rest of the market. In the first half of 2022, the company’s revenue rose nearly 40% to more than $30 billion.

• Meta Platforms (META):

  Meta Platforms, which was formerly named Facebook, is a technology conglomerate with a market cap of about $425 billion. Although the company earned more than $39 billion in 2021, in the first half of 2022 the shares lost more than half their value. Revenue rose less than 3% in the first six months of 2022 to $57 billion and profit fell by 29%. 

• Amazon.com (AMZN):

  The world’s largest online retailer has a market cap of about $1.3 trillion. In the first half of 2022, its shares fell by about a third and first-half sales growth slowed to just 7%, or a total of $238 billion.

• Tesla (TSLA):

  The electric-vehicle maker and clean energy company had a market cap of $860 billion as of early September 2022. In the first half of the year, Tesla’s shares fell more than 30% though sales surged 60% to almost $36 billion. 

Potential benefits of mega cap stocks 

Investing in mega cap stocks has a number of potential advantages, including:

• Stability.

  Mega cap companies are large and tend to have well-established businesses, so they’re more likely to have stable revenue and earnings and less fluctuation in their share prices. They’re also less likely to have major financial setbacks or go bankrupt. Some investors feel that investing in companies with a strong, long-term history is less risky. ‍

• Dividends.

  Large, stable companies are more likely to pay dividends to their shareholders because they don’t need to reinvest profits into growth. ‍

• Transparency.

  Like all publicly traded companies, mega caps are required to regularly submit financial statements to the SEC, which makes it easy for investors to find and analyze public information about them. But they often go a step further and make presentations to investors that provide even more insight into their businesses and performance. ‍

• Financial resources.

  Because mega cap companies have the financial resources to back groundbreaking initiatives, their stock prices sometimes have large gains. A mega cap company may also be better able to absorb losses, raise capital, borrow and survive recessions.

Risks of mega cap stocks  

Investing in mega cap stocks, however, has potential disadvantages, including:

• Limited growth.

  Mega cap stocks tend to have lower growth potential compared to some smaller companies that are still expanding and taking business from rivals or creating a market for innovative products or services. 

• Underperformance.

  Small cap companies tend to outperform large cap companies during certain periods, such as when the Federal Reserve lowers interest rates to stimulate the economy.

• Perception not equating to reality.

  Market capitalization measures the stock market’s perceived value of a stock, and it typically understates a company’s total value. So market cap isn’t always a reliable indicator of a company’s financial health.

• Lack of diversification.

  Mega cap stocks may come from any sector, but they’re highly concentrated in tech. Investors who put their money only in mega cap stocks may not achieve the level of diversification many investors seek when trying to spread risk. 

The bottom line

As heavyweights in the investing world, mega cap stocks usually offer a proven track record, stability, and potential dividend payouts. The biggest downside is that the companies behind these stocks may not expand as quickly as smaller or newer companies with more room to grow. But investing in mega cap stocks can help protect investors against downturns in the market because the biggest companies often have the financial resources to withstand business reversals or economic downturns.