When you start getting deeper into the world of investing, you’ll begin learning an entirely new, finance-specific vocabulary. From assets and mutual funds to expense ratios and the New York Stock Exchange, there’s certainly a lot to absorb. But as you look into purchasing stocks in particular, you’re almost certain to hear different stocks being referred to as large-cap, mid-cap or small-cap — and the deeper you get into investing in stocks, the more relevant these terms will become.
So what exactly do these classifications mean, and why do they matter when it comes to investing in the stock market? We’ll fill you in on all the basics as we take a look at mid-cap stocks, why they’re classified as such and what type of investors they tend to attract. Plus, you’ll discover the types of mid-caps that are ideal for newer investors to check out.
What Are Mid-Cap Stocks and Funds?
A company’s stock is classified as either large-, mid- or small-cap based on market capitalization, which is essentially the sum total of how much money its stocks are worth on the market. A company’s market capitalization can be calculated simply by multiplying the total number of stocks it has sold to investors by the value of a single stock. If a company has 100,000 shares of stock and each share is valued at $50, the company’s market capitalization is $5 million.
Mid-cap stocks are those with a market capitalization of between $2 billion and $10 billion. Many mid-cap stocks tend to be shares of young companies that have outgrown their early startup stages and are now expanding and becoming more stable. Others are offered by more established but smaller businesses or niche businesses that are enjoying new demand for their products and services.
Mid-cap stocks are a great place to find growth stocks, which are stocks that are expected to grow their profits at a rate faster than the market at large. While not all mid-cap stocks are growth stocks, a mid-cap stock list is a great place to search for these types of stocks.
As with any type of stock, there are a few ways to go about investing in mid-caps. The first is through purchasing a mid-cap exchange-traded fund (ETF) or growth fund. ETFs are a way to purchase shares of multiple companies that share a single focus, such as a single industry or type of product.
Mid-cap ETFs like the Vanguard Mid-Cap ETF (VO) or iShares Core S&P Mid-Cap ETF (IJH) offer a great way to gain exposure to multiple stocks in the mid-cap category. There are plenty of great mid-cap-focused ETFs on the market, so it can be helpful to research to find the one that fits in with your investing goals. Alternately, you can always invest in individual mid-cap stocks. This can be a profitable route to go but requires a bit more legwork.
Should You Add Mid-Cap Investments to Your Portfolio?
Wondering whether you should add a few mid-cap stocks or funds to your portfolio? Both tend to be a great choice for investors who are looking for a mixture of stability and growth. On the small-cap end of the spectrum, you usually have companies that are either brand new or are still trying to find their big break in the market.
Small-caps tend to be volatile because their values can go either up or down very quickly. They tend to be riskier and are often bought by day or swing traders who plan to ride their price waves up and then sell them within a relatively short period of time.
On the other end of the spectrum, you have large-cap or “blue-chip” stocks. These are the stocks of some of the largest, most successful companies in the United States. While they’re much less versatile (but also less volatile) than small-caps, they also tend to grow at a much slower rate. These are stocks favored by investors who are looking to buy and hold for the long haul.
The beauty of the companies behind the best mid-cap funds and stocks is that they’re right at that sweet spot between brand new and well established. While their stocks aren’t quite as volatile as small-caps, these companies have made enough of a name for themselves that they’re in a great position to grow and expand into market-leadership roles. This means that they can sometimes increase in value at a faster pace than large-cap stocks while remaining less of a risk than small-caps.
Depending on the type of investor you are, adding a few well-placed mid-caps or mid-cap growth funds to your portfolio can be a great way to help diversify it. This is true if you own numerous small-caps and are looking for some longer-term plays or if you’re invested heavily in large-caps and are looking for a few faster returns.
Pros and Cons of Mid-Cap Investing
By now, the pros of investing in mid-cap stocks are becoming clearer. These are companies that have broken out of the small-cap market and are either already experiencing growth or are highly likely to.
Such companies also typically have an easier time finding financing to fuel their expansion than small-cap businesses due to their notable track records. While they may not be quite as big as large-caps yet, they also present the possibility of growth in a shorter amount of time.
Ironically, the cons of mid-caps are mostly the flip-sides of their pros. While they aren’t as risky as small-cap companies, they aren’t as likely to skyrocket in value overnight as some small-caps either. And while solid day and swing trades can be found in the mid-cap range, you’ll need to time your picks wisely. Mid-caps and mid-cap value funds are best for investors who plan to hold for at least a moderate amount of time in order to see real growth.
Additionally, while mid-caps tend to outperform large-caps in a shorter time frame, they’re also a bit less reliable. Because they aren’t yet massive corporations, mid-caps tend to have a harder time sustaining bear markets than bigger, more established companies. Many are also less diversified and depend on their product or service niche staying in demand as they grow.
Which Mid-Caps and Mid-Cap Funds Should You Invest In?
If you’re looking for the best mid-cap funds to invest in, it’s important to do your due diligence by checking out what stocks a fund has in its holdings. Some funds focus on mid-caps within a certain niche, more innovative selections or simply the best performing mid-cap stocks at the moment. When analyzing mid-cap stocks in general, be on the lookout for elements like the following.
Sales Growth: The hope for every aspiring mid-cap company is to someday grow into a market leader, and they can’t do that without strong sales. The company should offer products or services that are likely to remain in demand long enough to sustain its growth for years to come. When you’re looking over a company’s sales numbers, ideally you’d like to find that it’s grown over the past few years or quarters (or is steadily rebounding in the case of post-pandemic sales).
Profit Growth: Not only do you want to see that a company is enjoying good sales, but you also want some confirmation that its leadership knows how to properly manage its assets. Even if a company’s sales are through the roof, it won’t do much good if the business is also drowning in so much debt that it isn’t able to put its profits to good use. Whereas sales indicate how much money a company has coming in, profit margins tell you how much it’s able to keep. Ideally, you want to see positive growth in both areas.
Additionally, even if you’re looking to purchase individual mid-cap stocks, it never hurts to take a look at the holdings in the best mid-cap funds. If a successful fund determined a stock was worth adding to an ETF, then that stock may be worth looking into for you as an investor, too.
