Based on market valuation, companies in the stock market are categorized into large-cap, mid-cap, and small-cap ventures. The term cap or capitalization is a measure of the company’s size. Investors need a clear picture of the company’s market capitalization to make better investment decisions. As the name implies, mid-cap companies are middle-sized organizations, falling between large-cap and small-cap ones.
These companies rank from 101 to 250 after large-cap companies on the stock exchange indices. Investors invest in mid-cap stocks to reap higher growth and better returns, but these stocks are highly volatile too. Should you invest in these stocks is a question worth asking for? To get the answer, you need to understand “what are mid-cap stocks, what are their features, and who should invest in them?”
What are mid-cap stocks?
Mid-cap stocks refer to the shares of companies with a market capitalization, typically ranging from Rs 5000 to 20,000 Crore. The market value of a company in the stock market is calculated by multiplying its current stock price by the total number of its outstanding shares.
These stocks fall between large-cap stocks (companies with large market capitalizations) and small-cap stocks (companies with small market capitalizations). They represent a middle ground in terms of size and can offer a balance between growth potential and stability.
Investing in mid-cap stocks could be a good move for investors seeking a balance between the potential for higher returns that smaller companies may offer and the relative stability that larger companies tend to provide. Mid-cap companies usually have a record of growth, but may still have room to scale up compared to large-cap organizations.
As a result, mid-cap stocks can provide opportunities for investors to reap high returns, depending on how the company performs in the future. At the same time, investors may incur losses. Again, it depends on the company’s performance. So, these stocks bring a combination of growth potential, stability, and calculated risks to the table.
Features of mid-cap stocks?
Mid-cap companies grow from small-cap and have the potential to become large-cap. Some of their key features include:
Moderate market capitalization
Mid-cap stocks have a market capitalization that is generally larger than small-cap stocks but smaller than large-cap stocks. This moderate size can provide a balance between growth potential and stability.
Mid-cap stocks often have higher growth potential than large-cap stocks since they are still expanding their operations and may have more room for growth. They may operate in industries or markets that are experiencing rapid growth.
Mid-cap companies are typically more established than small-cap stocks and have a history of generating revenue and earnings. They may have a solid business model, quality products or services, and a proven customer base.
Mid-cap stocks tend to be more volatile than stocks of large-cap companies. Their share prices may experience higher fluctuations in response to market conditions, company-specific news, or changes in investor sentiment. This volatility can present opportunities for profit but also entails higher risk.
Increased risk compared to large-cap stocks
While mid-cap stocks offer growth potential, they also come with higher risks than large-cap stocks. These risks can include increased sensitivity to economic downturns, higher levels of debt, and potential liquidity challenges.
Who are mid-cap stocks suitable for?
Mid-cap stocks are the best bet for investors with the following investment objectives:
- Since mid-cap stocks have the potential to grow significantly, investors seeking high returns and substantial capital appreciation from investments should opt for them.
- Investors with a long-term investment plan may invest in mid-cap stocks. These stocks are equity investments requiring the investor to stay invested long-term. An ideal lock-in period to generate returns from mid-cap stocks could be seven years.
- Risk tolerance is a critical factor before investing in any stock. Those with moderate risk tolerance may opt for mid-cap stocks. These stocks are more volatile than large-cap stocks and may generate poor returns in a bear market.
It’s worth noting that mid-cap stocks may carry high volatility and risk compared to large-cap stocks. They may be more susceptible to economic fluctuations, industry-specific changes, or other factors that could impact their market performance. As with any investment, thorough research and consideration of your investment goals and risk tolerance are essential before investing in mid-cap stocks or any other asset class.
Frequently asked questions
What should be my lock-in period for mid-cap stocks?
The longer you stay invested, the more returns you may get with mid-cap stocks. An average lock-in period to generate returns from mid-cap stocks is seven years.
Are mid-cap stocks suitable for all investors?
No, they are not suitable for all investors. Investors with a moderate risk tolerance and a long-term investment horizon should consider investing in them. These stocks may not be appropriate for conservative investors who prioritize capital preservation or aggressive investors seeking high-risk, high-reward opportunities.
How can I identify potential mid-cap stocks to invest in?
Identifying potential mid-cap stocks requires you to do thorough research and analysis. While selecting companies, consider factors, such as their financial health, growth prospects, competitive position, industry trends, and management team. Fundamental analysis, including examining financial statements and evaluating valuation metrics, can help assess the company’s overall health and growth potential.
What are the risks involved in investing in mid-cap stocks?
While mid-cap stocks can offer growth potential, they carry certain risks too. Compared to large-cap stocks, they tend to be more volatile and can experience significant price fluctuations. Mid-cap companies are less financially stable and may have fewer resources than large-cap companies, which makes them more vulnerable to economic downturns. Besides, they may have lower liquidity, meaning buying or selling shares without compromising the stock’s price could be more challenging.
How can I mitigate the risks associated with mid-cap stocks?
When investing in mid-cap stocks, consider the following strategies to mitigate risks:
- Research and due diligence is vital. Conduct thorough research to know about the company’s financial health, competitive position, and growth prospects.
- Spread your investments across different mid-cap stocks, sectors, and asset classes. Doing this will reduce the impact of any single stock or sector.
- Have a long-term investment horizon to ride out short-term volatility.