Pros & Cons of Buying Mid-Cap Stocks
Mid-cap stocks are shares of publicly traded companies with market capitalizations of about $2 billion to $10 billion. The range also indicates where they fall in the spectrum of valuation between small-cap and big-cap (sometimes called large-cap) companies.
Because the stocks are approximations based on a company’s current value, their classification might change over time. There are also pros and cons to investing in mid-cap stocks — as there are when investing in stocks of all types and sizes.
Market Capitalization Investing
Market capitalization is a company’s total value: the number of outstanding shares a company has multiplied by the current price per share. For example, a company with 40 million shares selling at $100 a share would have a market cap of $4 billion.
When investing, the case can be made for including small-, mid-, and big-cap stocks in your portfolio. But when thinking about the numbers involved — small-cap companies have a value of less than $2 billion, and large-cap companies have a value of over $10 billion — understand that the values also govern potential growth.
In other words, small-cap stocks might grow into mid-cap stocks. But a large-cap stock can only stay a large-cap stock unless the value goes down. (Investors have informally come up with valuation categories for nano cap stocks, micro-cap stocks, and mega-cap stocks, but there isn’t a broad consensus about their cutoff values.)
Either way, when investing, the hope is generally for stocks to increase in value or appreciate — and the prevailing wisdom is that small- and mid-cap stocks are appealing because they have room to grow.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Market Cap As a Basic Investor Tool
Knowing the market cap of a company can help investors compare the company to others of similar size. An investor choosing auto-manufacturing stocks could look at mid-cap companies in that particular market sector and compare how they are doing against one another.
To dig even deeper into the basics, it’s good to understand the difference between stocks and bonds. Bonds are a type of debt instrument, whereas stocks represent ownership in a company. Generally, stocks have the potential to offer the highest gains, while bonds are generally safer.
Investing In Mid-Cap Stocks
Finding an investment strategy that makes sense for you is largely about understanding the trade-offs involved. There’s really no such thing as a sure thing in finance, and probably the only way to think about the “best” mid-cap stocks is to look for ones that will offer a return on investment — and ideally a large one, sooner rather than later.
Beyond that, here’s a look at a couple of possible advantages and disadvantages of investing in mid-cap stocks.
Growth, Earnings, Capital
Pro: Whether mid-cap stocks are the sole investments being targeted for a portfolio or they’re part of a more diverse selection, a good argument for them is that they are often companies that are trying to expand.
These are established companies in industries that are experiencing rapid growth, or are expected to. And thanks to that growth, the average mid-cap company’s earnings often grow at a faster rate than the average small cap, and with less stock volatility and risk.
Most mid-cap companies are small caps that have burgeoned, and some are on their way to becoming large-cap businesses. Growth eases the ability to access financing to fuel expansion, so mid-caps typically have an easier time obtaining financing than small caps do.
Investing in mid-cap stocks can be the happy medium between small-cap growth and large-cap stability.
Con: Mid-cap stocks can be more vulnerable than large-cap ones. Being middle tier, by definition, means such companies don’t have as much capital to sustain them through market downturns as big-cap companies do.
And because they are also not massive companies like large-cap companies with a value over $10 billion, it also means they are not as diversified as bigger-cap companies. If the market for that company disappears, the company is also at risk.
Performance
Pro: Because $2 billion to $10 billion is a sizable range of valuations, it means that mid-cap stocks often outperform large- and small-cap stocks just because it’s a markedly wide net of stocks. There are no guarantees that that will happen, of course, which is very important to keep in mind. And, naturally, historical performance is not necessarily an indicator of what will happen in the future.
Con: Investment risk is risk, and even those who don’t dabble in investing likely know that something that seems low risk isn’t the same as something that is not a risk. It doesn’t matter how many reports you read — there are always exceptions. It’s still a good idea to read up on different strategies and try to develop a sense of why some investments are riskier than others.
💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Researching Mid-Cap Stocks
Many mid-cap companies are household names, and you’d likely recognize a whole host of them. Even so, it’s best for anyone interested in investing in mid-cap stocks to do their homework — look at who’s running the company, who’s already invested, and what the stated goals in earnings and annual reports are.
And it might be smart to consult a financial professional if you need guidance.
It’s tempting to think of a “hot tip” as something you must rush to get in on, but it’s worth taking a breath and considering what you might be overlooking by fixating on something that seems lucrative but also requires urgent action. Again, do your homework.
The Takeaway
Market capitalization is a way for investors to understand the value of different companies and compare their performance and outlook, and mid-cap stocks — which can be seen as lying between small-cap growth and big-cap stability — are one investment strategy to consider.
But there are pros and cons to investing in mid-cap stocks, as there are when investing in other types of stocks. It’s always best to do as much research as you deem necessary before making decisions, and even consider consulting with a financial professional.
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