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Mid-Cap (Company Shares) Definition
Mid-cap refers to public company shares that have a market capitalization or market value between $2 and $10 billion. As the name implies, it falls between large-cap and small-cap. Categories of large-cap, small-cap, and mid-cap are just approximations that are bound to change with time.
A Little More on What is a Mid-Cap Share
Well, some analysts consider large companies like those worth $10 billion to be mid-cap. What investors expect from mid-cap is that it will grow and increases profits, productivity as well as market share. All these put investors in the middle of a growth curve.
Generally, mid-cap is less risky because it is at the growth stage. However, it can be riskier than large-cap. Successful mid-cap companies face an increased market capitalization related risk, mainly due to increased share prices. The situation may lead to mid-cap falling out of the category.
Although the market price may determine market capitalization, a company’s market price of above $10 may necessarily not represent mid-cap stock. Market capitalization is defined as a measure of the company’s market value.
How Does Mid-Cap Work?
Analysts calculate the market price by multiplying the current market price by the current number of outstanding shares.
Market Capitalization = (Number of Outstanding Shares) x (Stock Price)
For instance, let’s assume that Company XYZ has 10 billion shares at $1 per share. If this is the case, then we can say that the market capitalization of company XYZ is $10 billion. On the other hand, Company ABC has 1 billion outstanding shares going at $5 per share. In this case, company ABC will have a market capitalization of $5 billion.
Although company XYZ has a lesser stock price, the market capitalization is usually higher than that of company ABC. On the other hand, despite Company ABC having a higher stock price, its outstanding shares stand at one-tenth.
Why Investors Need to Include Mid-Cap in their Portfolios
Generally, when it comes to raising funds, mid-caps have various advantages compared to small-caps. These advantages are enough reasons for investors to include mid-cap in their investment portfolios.
Mid-cap stocks investment is generally profitable. There are average earnings when it comes to mid-cap since it has a faster growth rate compared to small-cap. Also, it comes with less risk and volatility. In addition, mid-capitalization stocks’ profits are sustainable for a long period leading to large capitalization.
- Financial Health
Companies with a strong balance sheet often sail through the lean years. Since mid-caps have stronger balance sheets compared to small-cap, there is a lesser risk, and they provide higher returns. Generally, a mid-cap investment can be termed as a combination of large cap’s financial strength with the small cap’s potential growth. Such a combination often results in above-average returns.
Investors have always kept into consideration the quality of the revenue growth whenever they want to invest in mid-cap stocks. They consider the growth of both revenues and earnings as core factors in any long term investment. Mid-cap stocks have over the years outperformed others due to their top and bottom lines superior growth. Investors should, therefore, consider mid-cap stocks as a valuable investment area.
- Reasonable Price
Investors always look forward to buying stocks at a considerably low price. So, when evaluating mid-cap stocks, investors should always focus on growth measures. Such measures may include earnings and sales growth rates. Regardless of the measure an investor chooses, he or she should consider the quality of the company.
Why should Investors Buy Mid-Cap Stocks?
For a portfolio to be well-diversified, the mid-cap stocks or mutual funds must be of a certain percentage. The percentage amount is highly dependent on the investor’s goals as well as asset allocation. The following are reasons why an investor should invest in mid-cap stocks:
- Mid-Caps have Business Cycle Expansion
During the expansion phase of the business cycle, mid-cap companies tend to perform well. There is always steady growth when the capital is still inexpensive, and interest rates are low.
- Mid-Cap are Less Risky
Compared to small-cap companies, mid-cap companies are less risky. When there is an economic downturn, the chances of such companies going bankrupt are small compared to the small-cap companies. It means that they can survive during economic turbulence.
- Mid-Cap have a Track Record and are Stable
Mid-caps have outperformed both the large and small caps for over ten years. They have also been in existence for a long time. For this reason, their track record is more stable compared to others.
Note that companies do have different growth potential and earnings. It is vital for an investor to carry out research before he or she decides to invest in a given company. Generally, mid-caps are less risky than small-caps. Their returns are also higher than those of large-caps.
- Mid-caps are Well Known
Most mid-caps are known in the market and also focused on a specific business. Their familiarity in the market makes them perform well in the market.
- Mid-caps vs. Large-Caps
Though riskier compared to large caps, mid-cap are likely to have higher returns a deal that can be attractive to investors.
The Bottom Line
Investing in mid-cap is one of the best ways to diversify investors’ portfolios. So, if as an investor, you feel that evaluating individual stocks is too demanding, the mutual funds could be your best alternative. With mutual funds, professionals can do the evaluation process on your behalf. Whatever you decide to invest in, mid-cap is one of the best investments an investor can think of.