A mid-cap stock is a stock issued by a company defined as medium-sized, as opposed to large or small.
For investors, company size is not about sales, number of employees or how many offices and factories they maintain. Rather, it’s about market capitalization, the dollar value of shares traded by the public.
Naturally, that dollar number can go up and down with the fortunes of the company represented by the shares.
Nevertheless, as a proxy for size, market cap is a good apples-to-apples metric. It levels the playing field between companies that might have huge revenues but modest profits or vice versa.
Currently, investors look at any company with more than $10 billion market cap as a large-cap stock. Those below $2 billion are small-caps.
That means companies in the middle, between $2 billion and $10 billion, are mid-cap stocks.
Why differentiate between large-cap, mid-cap and small-cap stocks? Because they tend to behave different over long investment periods.
In any given month, year or quarter, the price of a single stock could be higher, lower or about the same.
Nevertheless, investors have learned that large companies grow more slowly and small companies tend to grow more quickly.
Large-cap stocks grow slowly because they often have captured all of the market share available to them. They have two or three large competitors and have to fight to keep their slice of the pie.
Growth is slower and profits tend to be constrained. These large companies often offer their investors dividends, a share of the company’s earnings, to keep them interested in holding shares.
Small companies tend to be in new segments of the economy. They can grow quickly but face a host of competitors. Bankruptcy is a common outcome for small stocks.
The mid-cap firm is somewhere in-between, still growing but more stable.
Investors who seek a balanced, risk-adjusted portfolio often look to mid-cap stocks to counterbalance the extremes of high and low growth in their stock allocations.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.