Mid-Cap Stocks
Mid-Cap or Mid-Capitalisation is a term used to describe companies that have a market capitalization or market value between $2 and $10 billion. Mid-Cap Stocks fall between large-cap and small-cap stocks. The terms small-cap, mid-cap, and large-cap are used to describe the approximate market values of a company and can hence change over time.
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Features:
- Diversity: Mid-cap shares lie in between small-cap stocks and large-cap stocks. They vary in terms of risks and returns. For instance, mid-cap companies that are nearing developmental stages offer greater stability than returns while some companies that have recently become mid-cap from small-cap have greater returns.
- Growth potential: mid-cap companies have high growth potential and a high chance of growing their profitability, productivity, and market value. These companies are expected to become overnight successes during the bullish market and hence increase the investor’s returns.
- Risk: Mid-cap companies are in the middle of the growth curve. Since they are in the growth stage, they are considered riskier than large-cap companies and safer than small-cap companies.
- Liquidity: These stocks are more liquid in comparison to small-cap stocks. They are known amongst investors and hence are trustworthy.
Examples:
Some examples of mid-cap stocks are:
- Escorts
- Crompton Greaves Consumer Electricals
- Relaxo Footwears
- Polycab India
- Deepak Nitrite
Advantages:
- Growth potential: mid-cap companies have a better chance of raising money via credit than small-cap companies and therefore have a greater expansion and growth potential.
- Returns: Since most of the midcap companies are in the middle of the growth graph, they have great value appreciation chances and have good dividends.
- Low prices: A lot of mid-cap shares are often not analyzed resulting in less attention from large institutions and investors. Because of this, they tend to have low prices making it more affordable.
Risks:
- Value trap: Value trap occurs when a company operates in low profits with limited cash flow consistently and cannot get out of this phase. The low-ranking mid-cap stocks are more likely to value trap and might go unused if the trend continues for a longer period.
- Low resources: Mid-cap stocks are more prone to have less efficient managerial and organizational resources than large-cap stocks. Hence, even though they earn high profits and have value appreciation, they might not be equipped to utilize the same efficiently.
- Financial Bubble: A mid-cap company’s exceptional performance can be because of an unstable financial bubble. Most of these companies, do not have the financial capacity to manage when the bubble pops.
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Conclusion:
Mid-cap is a term that describes companies and stocks which fall in between large-cap and small-cap. Midcaps fall in the range of $2 and $10 billion. This can change with the change in a company’s market valuation. These stocks have high growth potential and are well known among investors. They sit in the middle of the growth curve and have a lower price.
Author – Abha Shetty
About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.
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