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Mid-Cap Stocks

What Is A Mid-Cap Stock?

Mid-cap stocks are generally considered to be those companies with a market capitalisation—the stock price multiplied by the outstanding number of shares—between US$2 billion and US$10 billion. They fall between large cap stocks, which have market caps above US$10 billion, and small caps, which are valued at between US$300 million and US$2 billion.

Generally speaking, mid-cap stocks are slightly more risky than large caps, which have more financial resources at their disposal during an economic downturn, but less risky than small caps, which have fewer. By the same token, mid-caps generally don't grow as fast or are as nimble as small caps, but tend to grow faster and make quicker decisions than large companies.

Because they are larger and older, mid-caps are more likely to pay dividends than small caps, and dividends can play a large part in the overall return on a stock.

Prominent Mid-Cap Companies

Mid-caps may not be as big as their large cap counterparts, but that doesn't mean they're small. In fact, many members of the S&P 400 mid-cap index, one of the most well-known indexes that tracks these companies, are household names that have been in business for a long time. They include the following:

  • Bed Bath & Beyond
  • Dunkin' Brands
  • Domino's Pizza
  • Eaton Vance Corp.
  • Footlocker
  • Grubhub
  • Legg Mason
  • LendingTree
  • Mattel
  • Skechers
  • Wendy's
  • World Wrestling Entertainment[1]

Appeal And Risks Of Mid-Cap Stocks

The appeal of mid-cap companies is that because they are large—but not too large—they still have room to grow, which could make them attractive as a takeover candidate by a larger company. But they're not as risky as small caps, many of which have graduated from being a startup but still may suffer from growing pains. As a result, mid-caps provide a balance of both growth opportunity and stability.

Many financial advisors advise investors to have a mix of large, small and mid-cap stocks in their equity portfolio to diversify the risk, as each sector tends to perform differently during different economic and financial environments.

  • Small cap stocks, for example, generally outperform at the beginning of economic recoveries because they can grow faster in percentage terms, but they can get hurt more during downturns.
  • Large caps, by contrast, grow more slowly, but they are in a better position to weather economic downturns.
  • Mid-caps fall somewhere in the middle, which makes them a good diversification by themselves between the two extremes.

Where Can You Buy Mid-Cap Stocks?

Investors can buy mid-cap stocks directly or through the many mutual funds and exchange-traded funds (ETFs) that invest in them. By buying mid-cap funds, investors can further diversify their risk.

Mid-cap companies are generally easier to research than small cap companies, many of which don't have large investor relations departments that provide information about the company. Mid-caps are often fairly large, well-known companies that generate a fair amount of news coverage. They are also covered by more Wall Street firms, some of which tend to ignore small caps.

Summary

Mid-cap stocks are companies with a market capitalisation between US$2 billion and US$10 billion. They fall between large cap stocks, which have market caps above US$10 billion, and small caps, which are valued at between US$300 million and US$2 billion.

Mid-cap stocks tend to be slightly more risky than large caps but less so than small caps. Likewise, mid-caps generally outperform large caps over time but lag behind small caps. As a result, mid-caps are seen as a good diversification between the two sectors.

Disclosure

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