What Is Mid-Cap?
Mid-cap (or mid-capitalization) is the term that is used to designate companies with a market cap (capitalization)—or market value—between $2 and $10 billion. As the name implies, a mid-cap company falls in the middle between large-cap (or big-cap) and small-cap companies. Classifications, such as large-cap, mid-cap, and small-cap are approximations of a company's current value; as such, they may change over time.
- Mid-cap is the term given to companies with a market cap (capitalization)—or market value—between $2 billion and $10 billion.
- For companies, some of the appealing features of mid-cap companies are that they are expected to grow and increase profits, market share. and productivity; they are in the middle of their growth curve.
- Mid-cap stocks are useful in portfolio diversification because they provide a balance of growth and stability.
There are two main ways a company can raise capital when it's 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, also referred to as 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 somewhere in between these two categories (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 to the spectrum of market capitalization for the sake of clarity.
For investors, a mid-cap company may be appealing because they are expected to grow and increase in profits, market share, and productivity; they are 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 a company's 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. If company B has one billion shares outstanding at a price of $5, 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.
Advantages 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.
No one can accurately predict 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.
However, there are many advantages to mid-cap companies that investors may want to consider. When interest rates are low and capital is cheap, corporate growth is generally stable. Mid-cap companies typically can get the 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. In addition, 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.