Mid-cap stocks are companies with a market cap, or market value, of between $2 billion and $10 billion. They offer you, as an investor, a unique opportunity to diversify your portfolio and effectively manage risk.
After reading this article, you'll know what is considered a mid cap stock and how to invest in it. Plus, you'll know why mid-cap stocks might be the sweet spot of your investment portfolio.
What is a Mid-Cap Stock?
Mid-cap stocks are stocks from companies with a market capitalization between $2 billion and $10 billion. Market capitalization is calculated by multiplying a company's share price by the total number of its outstanding shares. It's just an indication of the size of the company. Small-cap stocks, for example, refer to companies with a market cap of less than $2 billion, whereas the large-cap stock definition refers to companies with a market cap of greater than $10 billion but less than $200 billion. Finally, a mega-cap stock list includes companies with over $200 billion in market cap.
Mid-cap stocks offer a unique opportunity to diversify your portfolio and manage risk.
Why? Mid-caps don't move in the same markets as either small- or large-cap stocks. For example, if small-cap stocks take a hit due to a specific economic event, mid-caps might remain relatively unaffected. Mid caps are generally less volatile than small caps but offer more growth potential than large caps.
If you're an investor seeking diversification and growth, or if you like to take on more risk in search of greater potential reward, mid-cap stocks offer the best of both worlds. By owning a portfolio of large-cap and mid-cap stocks, you can mix your portfolio and achieve growth and stability. But you need to know how to invest in them wisely. Let's look at how to invest in mid-cap stocks and where to find them.
Mid-Cap Companies Explained
If you're researching mid-cap stocks, you might also wonder: What is a mid cap company, anyway? Mid cap companies have a unique place in the stock market. They boast greater potential for growth than their large-cap counterparts but are still less risky than investing in small-cap stocks. If you're looking for a solid balance of risk and reward, mid caps can be an ideal fit.
Whether you're considering investing in mid caps that could double or looking for cheap mid caps to buy, be sure you understand the different types of mid-cap companies out there. Mid caps fall into three categories: established startups, companies that have experienced successful growth and mature businesses with moderate to high market share. All three offer some stability relative to small caps while providing higher returns than large caps.
Established startups may offer exciting new technologies or services (those you've read about in the news). Still, they also carry substantial risk since they haven't necessarily proven themselves yet in the market. On the other hand, mature businesses tend to provide a more stable atmosphere. But they also have the potential for more moderate growth since they've already established themselves in the market. Finally, established growth companies often have to surpass the other two categories. They often possess both promising opportunities for growth and a solid foundation to stand on.
Market Capitalization, Explained
Market capitalization, or market cap, is the total value of a company's stock. You can calculate it by taking the number of outstanding shares multiplied by the price per share. Companies with larger market caps have more assets and funds available to them than companies with smaller market caps.
How to Invest in Mid-Cap Companies
Now that you know what mid cap stocks are, it's time to learn how to invest in them. You can invest in mid-cap stocks for the unique benefits they bring to your portfolio. You can also take on additional risk by investing in mid-caps to help grow your total returns.
Investing in mid-cap companies can be done in several ways. Some investors choose to do it by buying individual stocks. However, most mid-cap stocks are more challenging to buy than large-cap stocks. Since a mid-cap stock isn't as "big" as a large-cap stock, it's often harder to find a broker that sells and buys them. You may have to trade through a full-service broker, who may charge you higher fees and mark up the price of any stock purchases.
A second option is buying mid-cap stock through an actively managed mutual fund, in which case you won't worry about day-to-day management. Instead, a professional fund manager will decide which stocks to buy and sell, when and in what amounts. If you buy a mid-cap stock through an actively managed mutual fund, you won't worry about day-to-day management.
Other investors use an exchange-traded fund (ETF) to gain diversification benefits without actively managing a portfolio. ETFs can offer greater diversification than a single stock or mutual fund because they contain a mix of stocks, bonds and other assets. ETFs sometimes also offer lower costs than many actively managed funds, so you may be able to save money on fees. ETFs can expose you to mid-cap stocks that may be difficult to access through traditional investments.
Ultimately, no matter which investment option you choose regarding mid caps, understanding risk management is key, especially if investing directly in individual stocks. Taking on too much risk could mean losses in your portfolio. But if you do it correctly, investing in mid caps can be an excellent way of generating long-term returns.
Below, we guide you through investing in mid-cap stocks step by step.
Step 1: Research mid-cap companies.
To invest in mid-cap companies, you must first research them. Consider what industry they are in, their financial history and performance, their competitive position and their potential for growth. Read up on the specific company itself, such as its management team, and learn about upcoming events, such as a new product launch.
Step 2: Compare prices.
Once you've found a few companies you're interested in, compare the prices of their stocks. These should be a reflection of the company's value, so you can make sure that you're getting a good deal. You can compare prices by looking at the stock's price-to-earnings ratio (P/E) and the company's financial statements. This will help you determine the company's risk level and whether or not it's worth investing in.
Step 3: Perform further analysis.
After your initial research and analysis, consider other factors affecting the company's future performance. This means reviewing the company's balance sheet, income and cash flow statement. This will give you an idea of the company's financial health and performance. Research the company's stock price history and compare it to the overall performance of similar companies in the same industry. This includes looking at industry trends, the macroeconomic environment and the company's competitive position. Consider the company's risk profile, too. Factor in debt, liquidity and the management team.
Step 4: Make your investment decision.
Once you've done your research and are confident in your investment decision, you can invest. Decide how much money you will invest and begin buying mid-cap stocks. Either buy the stock directly from a broker or buy into a mutual fund or ETF that holds mid-cap stocks. Remember, mid-cap companies can be riskier investments than large-cap companies. That means you should only invest money you can afford to lose and only invest in companies you believe will provide you with returns.
Step 5: Monitor your investment.
Monitor your investment once you've made it. Watch for news and developments related to the company and its industry. Evaluate it regularly to ensure it's still in line with your goals. As your portfolio changes over time, rebalance it periodically by selling off some investments and adding money to others. You can also rebalance your portfolio by moving money from large cap to mid cap or vice versa.
Example of a Mid-Cap Company
Polaris Inc. (NYSE: PII) is a mid-cap company specializing in the manufacturing of snowmobiles, all-terrain vehicles and other recreational vehicles. Founded in 1954 in Roseau, Minnesota, PII has become a leading manufacturer and distributor in the United States and internationally. The company employs over 14,000 people and has a market cap of over $6 billion.
PII became a mid-cap company after it went public in 1994. Since then, the company has seen steady growth in sales and profits and has expanded its product portfolio to include watercraft and motorcycles and add to its in-house engine manufacturing capacity. PII's focus on innovation and product quality has allowed it to remain competitive in the market and become a leader in its industry.
PII is an excellent example of a mid-cap company with a strong balance sheet, earnings and cash flow and a diversified product portfolio. Its ability to remain competitive and profitable in a challenging market makes it a solid option if you seek consistent returns and strong long-term growth.
Mid-Cap Stocks: In the Sweet Spot
Mid-cap stocks, nestled as they are in the sweet spot between small-cap and large-cap stocks, are a popular investment option, providing a combination of stability and growth potential. These companies can provide you with a way to diversify your portfolio and access potential growth opportunities. By researching possible mid-cap investments, you can determine which ones are best suited to your needs and goals.
If you've read this far, you have the answer to the question: What are mid cap stocks? And you now know that they're a great option if you're looking to diversify your portfolio and access opportunities for growth. But maybe you have further questions. Below, we'll answer some of the most commonly asked questions about mid-cap stocks so you can make an informed investment decision.
What is the definition of a mid-cap company?
A mid-cap company is a publicly traded firm with a market capitalization that falls between $2 billion and $10 billion, typically measured by the total value of all its outstanding shares. These companies are usually more established than small-cap companies, so their stock can be a relatively safe investment option while still demonstrating higher growth potential.
What is the difference between a large- and mid-cap company?
Large-cap companies have a market cap of $10 billion or more, while mid-cap companies have a market cap between $2 billion and $10 billion. Large-cap stocks can provide stability and dividend income but may not offer as much growth potential as mid-caps due to their size and established market presence. Mid-caps typically experience higher volatility as they still establish themselves in their industries, carrying the greater risk and the potential for higher returns.
What are mid-cap and small-cap companies?
Mid-cap companies have a market capitalization between $2 billion and $10 billion, while small-cap companies have a market cap of less than $2 billion. They can allow you to diversify your portfolios and gain access to the potential for higher growth. Small-cap stocks tend to be more volatile but offer more potential rewards.