What is a Mid-Cap
A mid-cap is a company with a market capitalization between $2 billion 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.
BREAKING DOWN Mid-Cap
Many mid-caps 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. But because share prices fluctuate and mid-caps continue to grow, the market capitalization is likely to change.
Mid-caps can be invested in directly through a company's stock or by buying mid-cap mutual funds — an investment vehicle that focuses on mid-cap companies.
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.
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.
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 low-, 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, there are some reasons why you may want to consider mid-caps as an investment. First, when interest rates are low and capital is cheap, corporate growth is stable. Secondly, 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 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 means more for your bottom line.