Investing Basics: Mid-Cap Stocks

Investing Basics: Mid-Cap Stocks

Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Mid-cap stocks are shares of companies with total market capitalization in the range of about $2 billion to $10 billion. Along with large-cap stocks and small-cap stocks, mid-cap stocks are one of the three main stock categories and offer a compromise between the growth, risk and volatility tradeoffs of their larger and smaller counterparts. How Does Market Capitalization Work?

Market capitalization, or market cap, is a formula for calculating a company’s value in the stock market. Market cap is equal to the price of a company’s stock multiplied by the number of shares outstanding. A company with 100 shares outstanding each worth $100, for example, would have a market cap of $10,000 (100 shares x $100).

Information on share value and total number of outstanding shares is available for all publicly traded companies. Most stock research tools also indicate what kind of market capitalization a company has.

Even though a company’s size doesn’t tell you everything you need to know about its stock, stocks of similar sizes do tend to share many characteristics. That’s why it can be useful to divvy up the stock market into large-, mid- and small-cap categories. Market cap also comes in handy for a few reasons: Index membership. Index providers use market cap data to decide which companies will be included in major benchmarks. In turn, index funds are directly impacted by these decisions.

Fund strategies. Portfolio managers often focus on specific attributes, like market cap, when deciding on their investment strategy—and ultimately, which stocks will be included in funds.

Asset allocation. To balance out risks in a portfolio, you may want to include a mix of stocks (or funds) that include large-, mid- and small-cap companies.

Mid-Cap Stocks

Mid-cap companies haven’t quite made it to the large-cap status but have a more established business track record than small-cap companies. Similarly, their stocks offer a middle ground to the risks and rewards of their smaller and larger counterparts.

Mid-cap companies typically have a market value that ranges from approximately $2 billion to $10 billion. These companies usually have an established business model and foothold in their respective industries and may experience rapid growth as they expand market share. They often are the target of mergers or acquisitions by large-cap companies. However, the mid-cap category also includes former large-cap companies that have fallen in size and dominance.

In terms of their investing attributes, mid-cap stocks typically are less risky, experience less volatility and may have less growth potential than small-caps—but they are more risky, experience more volatility and have higher potential gains than large-cap stocks.

There are two primary benchmarks for mid-cap stocks: S&P MidCap 400 Index. The S&P MidCap 400 Index tracks the performance of 400 mid-sized U.S. companies with valuations between about $2 billion and $8 billion. As of September 2021, the median market cap of companies in this benchmark was nearly $5.5 billion.

Russell Midcap Index. The Russell Midcap Index tracks nearly twice the number of companies—more than 800—and is a subset of the larger Russell 1000 Index. The companies in this index had a median market cap of $11.3 billion as of September 2021.

Mid-Cap vs. Large-Cap Stocks

Mid-cap companies could be the large-caps of the future—or past. Large-cap stocks have the broadest range of valuations, from $10 billion up (currently topping out at $1+ trillion), so it’s helpful to consider whether a mid-cap is rapidly growing or declining. In addition, there are differences in the business and investment characteristics between mid- and large-caps:

> Stage in the business lifecycle. Large-caps are the most well-established companies in their respective industries. Compared with mid-caps, their businesses are more diversified and could include a broad range of products and services in multiple industries.

Geography. Large-cap companies typically are multinational, operating in countries around the world. Among the 500 U.S. large-cap companies, only 62% of sales are domestic, compared with 75% for the 400 mid-cap companies, according to 2019 figures compiled by S&P Dow Jones Indices. As a result, mid-cap companies are less exposed to currency fluctuations or a slowdown in the global economy than large-caps. Conversely, they may experience more volatility if domestic economic conditions falter.

Growth. Because mid-cap companies may still be expanding, their stocks could experience bigger gains than large-caps. In fact, since 1994, the S&P MidCap 400 Index has outperformed the S&P 500 (and also the S&P SmallCap 600), […]

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