Mid-cap stocks refer to medium-capitalization stocks, that is, the shares and equities of medium-sized companies. By medium-sized companies, we mean those firms that lie between the large-capitalization and the small ones. Their market capitalization usually ranges between Rs. 5,000 – Rs. 20,000 crores. The capitalization size may change and accordingly, the companies may fall into different categories. It is the Securities and Exchange Board of India (SEBI) that lists the capitalization size and the companies that fall into these categories. The first 100 are the large-cap, also known as Bluechip Companies, while the companies ranging from 101 to 250th are the mid-cap companies.
Features of Mid-cap Stocks
Mid-cap companies are either those firms that have grown from the small-capitalization or are the ones that could be the next large-cap companies. Some of its key features are:
- Growth Potential
Mid-cap stocks encapsulate those firms that have high growth rates. It is because they have not reached the maximum growth potential like that of the large-cap stocks. Similarly, owing to larger capital size, they are more stable than the smaller companies.
Mid-cap stocks are diverse as they include a large range of companies that are bordering on both the large-cap and the small-cap stocks. Some of them are at the developmental stage where they offer good returns and less volatility than the small-cap. While some of them show greater stability and are graduating to be the large-cap. Some firms have risen far above the status of small-sized companies yet are not near to being large-capitalization companies. Thus, they have a broad spectrum of stocks.
Mid-cap stocks carry moderate risks as they may survive the market turbulence in a better fashion than the smaller companies. It is so because they have the larger capital size to deal with the bear market. Likewise, they also offer more productivity and profitability than the blue-chip or larger companies and hence investors may expect that the market share shall expand in the bullish market. Therefore, they do carry moderate market risks.
They are not as liquid as the blue-chip stocks but due to their growth in capital size, market share, and market reputation, they are traded more than the small-cap stocks. Hence, they offer moderate liquidity as well.
Should You Invest in Mid-cap Stocks? Why?
Should you invest in mid-cap stocks? We say why not, provided the investment objectives of the mid-cap stocks match with that of the investor. So, know the reasons as to why should you invest in mid-cap stocks:
1. Good Returns
Reiterating the fact that the mid-cap stocks have a great growth rate and chances of market expansion leading to earning good returns from investments. They can grow from the small-cap stage to the large-cap and give exponentially high returns.
2. Balanced Risks
As mentioned above, they come with moderate risks because of the fact that they are in the middle of the growth graph, giving higher returns than the large-cap stocks and more stability than the small-cap ones. They not only have a medium-sized capitalization but also have a larger scope to raise finance through credit and survive in the market headwinds.
Large-cap stocks get high-priced but mid-cap stocks are traded at a lower price than large-cap where investors can buy them at affordable rates and earn good returns. They are gradually earning a reputation in the market but are less analyzed and noticed by the big players in the stock market. Investors can earn substantial returns by buying them early before the big institutions and seasoned investors set their eyes on it.
4. Market Reputation
Over time, medium-sized firms earn a reputation for themselves in the market as profitable companies with good balance sheets and timely dividend payouts. They also get more frequently traded allowing higher liquidity and having room for value appreciation. You can also find ample information about the mid-cap companies like the past performance records in comparison to the benchmark indices and the peers. You can evaluate the financial health and history of stocks before you invest.
Risks of Mid-cap Stocks
Mid-cap stocks are more volatile than large-cap stocks, not only because of lesser capital size and fewer revenue resources, they are also not established as the large-cap companies. They may be lagging in the managerial infrastructure and the organizational management as that of their large-cap peers to effectively and optimally utilize the high returns they earn. This way, they may collapse in the bear market if they fail to retain the value appreciation.
Also, the markets are unstable and can lead to a financial bubble when some mid-cap stocks may reap high returns. When the bubble bursts, it may not sound so profitable. They can also be a victim of a value trap where they may go defunct in the long run if they continue to work with low profits with limited cash flow.
Who Should Invest?
Based on the features, risks, and investment objectives of the mid-cap stocks, investors with the following goals should invest:
- Those who seek capital appreciation as the mid-cap stocks can grow exponentially and give high returns
- Investors who can stay invested for long. If you invest in small-cap mutual funds, that invest majorly in small-cap stocks rather than other capitalization stocks and asset classes, then an investment horizon of at least 7 years is suggested. The stocks will grow, realize their value in the stock market, and as the market share of mid-cap stocks will expand, the funds will reap optimum returns
- Investors with moderate risk tolerance who can invest in stocks that are more volatile than the large-cap stocks
- Investors looking to diversify their portfolio with an asset class of that category that can lead to wealth accumulation along with other stocks and debt instruments
Wrapping it up:
Mid-cap stocks are stocks and shares of those firms that lie between the large and small capitalizations. The list is prepared by the SEBI and these stocks offer moderate risks, with balanced liquidity and substantial returns. They have a good potential for growth and can survive the market volatility better than small-sized firms. Over the last few years, they have often outperformed both the large-cap and the small-cap stocks. Investors who aim to invest for the long term to earn good returns with a moderate risk appetite should invest to diversify their portfolios.