What is a Mid-Cap?
Mid-cap is the term given to companies with a market capitalization (value) between $2 and $10 billion. As the name implies, a mid-cap company falls in the middle of the pack between large-cap (or big-cap) and small-cap companies. Classifications such as large-cap, mid-cap and small-cap are only approximations and may change over time.
There are two main ways a company can raise capital when needed: through debt or equity. Debt must be paid back but can generally be borrowed at a lower rate than equity due to tax advantages. Equity may cost more, but it does not need to be paid back in times of crisis. As a result, companies strive to strike a balance between debt and equity. This balance is referred to as a firm's capital structure. Capital structure, especially equity capital structure, can tell investors a lot about the growth prospects for a company.
One way to gain insight about a company's capital structure and market depth is by calculating its market capitalization. Companies with low market capitalization, or small-caps, have $2 billion or less in market capitalization. Large-capitalization firms have over $10 billion in market capitalization, and mid-cap firms fall in between, ranging from $2 billion to $10 billion in market capitalization. Additional categories such as mega-cap (over $200 billion), micro-cap ($50 million to $500 million) and nano-cap (less than $50 million) have been added recently for the sake of clarity.
The appealing feature of mid-caps to investors is that they are expected to grow and increase profits, market share and productivity, which puts them in the middle of their growth curve. Since they are still considered to be in a growth stage, they are deemed to be less risky than small-caps, but more risky than large-caps. Successful mid-cap companies run the risk of seeing their market capitalization rise, mainly due to an increase in their share prices, to the point where they fall out of the 'mid-cap' category,
While market capitalization, or market cap, depends on market price, a company with a stock priced above $10 is not necessarily a mid-cap stock. To calculate market capitalization, analysts multiply the current market price by the current number of shares outstanding. For example, if company A has 10 billion shares outstanding at a price of $1, it has a market capitalization of $10 billion. Company B has 1 billion shares outstanding at a price of $5, so company B has a market capitalization of $5 billion. Even though company A has a lower stock price, it has a higher market capitalization than company B. Company B may have the higher stock price, but it has one-tenth of the shares outstanding.
- Mid-cap is the term given to companies with a market capitalization (value) between $2 and $10 billion.
- The appealing feature of mid-caps to investors is that they are expected to grow and increase profits, market share and productivity, which puts them in the middle of their growth curve.
- Mid-cap stocks are useful in portfolio diversification as they provide a balance of growth and stability.
The Benefits of Mid-Caps
Most financial advisors suggest that the key to minimizing risk is a well-diversified portfolio; investors should have a mix of small-, mid- and large-cap stocks. However, some investors see mid-cap stocks as a way to diversify risk as well. Small-cap stocks offer the most growth potential, but that growth comes with the most risk. Large-cap stocks offer the most stability, but they offer lower growth prospects. Mid-cap stocks represent a hybrid of the two, providing a balance of growth and stability.
What Makes Mid-Caps So Attractive?
No one can tell when the market will favor a specific kind of company, whether it’s a large-, mid- or small-cap. So it’s important to diversify your portfolio, as we mentioned above. But the percentage of mid-caps that you’ll want to invest in depends on your specific goals and risk tolerance. Whatever those may be, here are some reasons why investor's may want to consider mid-caps as an investment.
- When interest rates are low and capital is cheap, corporate growth is stable. Mid-cap companies can get credit they need in order to grow, and they do well during the expansion part of the business cycle.
- Mid-caps are not as risky as small-cap companies, which means they tend to do relatively well financially during times of economic turbulence.
- Many mid-caps are well known, are often focused on one specific business and have been around long enough to make a niche in their target market.
- And finally, because they are riskier than large caps, they may have a higher return, which could be more appealing to a less risk averse investor's bottom line.
Investor's can either buy a mid-cap company's stock directly or buy a mid-cap mutual fund — an investment vehicle that focuses on mid-cap companies.