In the stock market, the term "mid-cap" is defined by companies with a medium-sized market cap, typically between $2 billion and $10 billion. Mid-cap stocks are often companies that have moved past the volatility of their initial growth stages, but still have room for expansion, making them attractive to those looking to invest in companies with steady growth and moderate risk.
A financial advisor can help you determine how mid-cap stocks could fit into your overall investment strategy.
Mid-Cap Stocks – Definition
Mid-cap stocks often occupy an intermediate position in the market, exhibiting characteristics of both small-cap and large-cap stocks. Some well-known mid cap stocks include Five Below and Avis.
Mid-cap stocks often have proven business models and are working on expanding their market share. This middle ground can provide investment portfolios with growth opportunities while managing risk when compared with smaller, more volatile companies.
Small-Cap vs. Mid-Cap vs. Large-Cap Stocks
The primary difference between small-cap, mid-cap and large-cap stocks lies in the market capitalization and maturity of the companies.
Small-cap stocks are those with a market cap of under $2 billion. These companies are generally younger, with significant growth potential but higher risk due to their susceptibility to market volatility and less-established market positions.
Mid-cap stocks, by definition, range from $2 billion to $10 billion in market cap. They offer a middle-ground option, having achieved stability after several growth milestones but still capable of significant expansion into their markets.
Large-cap stocks are well-established, global companies with a market cap exceeding $10 billion. They tend to be less volatile but offer lower growth potential compared to small-cap or mid-cap stocks.
Why Market Cap Matters
Market capitalization is a valuable piece of information for investors because it gives insight into a company’s size, risk profile and potential for growth. Market cap helps categorize companies into different groups, allowing investors to tailor their portfolios according to their risk profile and financial goals.
Market cap also influences how a stock behaves under various market conditions. Smaller companies might see rapid swings in value, while larger companies tend to be more resilient in economic downturns.
Market cap can even help determine the level of institutional interest in a stock, as many mutual funds and other institutional investors have specific mandates regarding the types of stocks they can invest in based on market cap categories.
Mid-Cap Stocks and Asset Allocation
Mid-cap stocks play an important role in the diversification of investments. They can add a mix of growth and stability to a portfolio that includes more volatile small-cap stocks and more conservative large-cap stocks.
Including mid-cap stocks in your asset allocation can provide exposure to companies that are poised for growth while mitigating the extreme volatility associated with small caps.
Mid-cap stocks have historically outperformed large caps during economic expansions, making them an appealing option for long-term growth strategies. And many investors add mid-cap stocks to their portfolios because the growth potential comes without the same risks as smaller companies.
How to Invest in Mid-Cap Stocks
Before you invest in mid-cap stocks, make sure you do your research. Start by looking at the companies that have moved past their startup phases, but are not as saturated as large-cap stocks. Use financial metrics like revenue growth, earnings per share (EPS) and debt levels to evaluate the health and growth prospects of a mid-cap company.
Then, consider how mid-cap stocks fit into your overall investment strategy. They can be an excellent way to diversify a portfolio heavily weighted in either small-cap or large-cap stocks. Balancing your investments reduces the impact of any single stock’s performance on your portfolio.
Investors will also have to decide whether they want to invest in individual mid-cap stocks or funds. If you have specific mid-cap companies in mind, investing in individual stocks allows you to tailor your portfolio more precisely. Mid-cap funds, on the other hand, can offer a diversified selection of mid-cap companies within a single investment.
And finally, like with other financial investments, monitor your investments for industry-specific risks or market changes. Reviewing earnings reports, industry trends and company news can help you keep an eye on how your mid-cap holdings perform over time so you can adjust your portfolio as needed.
Bottom Line
Mid-cap stocks are defined by their blend of growth potential and stability. Including mid-cap stocks in your investment strategy can help you achieve a balanced portfolio that aligns with your risk tolerance and financial goals, especially if you're weighted too heavily towards small-cap or large-cap options.
Tips for Investing
- A financial advisor can help you analyze and manage investments for your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know what a potential return on an investment might look like, SmartAsset's free investment return and growth calculator can help you get an estimate.
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