What are Mid-Cap Stocks? Features and Risks

Depending on their market valuation, companies are known as large-cap, mid-cap, and small-cap. It is a measure that gives investors an idea of the company’s size. Investors need a clear picture of a company’s market capitalisation to make informed investment decisions. Mid-cap companies, as their name suggests, are middle size organisations based on their market value, between large-cap and small-cap. On the stock exchanges, these companies are listed from 101-250, after large-cap companies. Investors invest in mid-cap stocks for above-market returns. But should you buy mid-cap stocks? To find the answer, we need a detailed understanding of ‘what are mid-cap stocks?’ and if they suit your investor’s profile.

What are mid-cap stocks?

The market capitalisation of a company is critical for investors to guess the potential of a company and its inherent risks. It is an estimation of the company’s total value. The formula for market capitalisation is multiplying the share price with the total number of outstanding stocks. Mid-cap companies have a market capitalisation between Rs 5,000 – 20,000 crore.

Features of mid-cap stocks:

Mid-cap companies are those that have grown from small-cap and have the potential to become large-cap. Key features of mid-cap stocks are the following.

Diversity:

Mid-caps are heterogeneous, lying between the small-caps and large-caps. Hence, they vary regarding growth potentials, risk, and returns.

Growth:

Mid-cap companies are on their growth path, which makes the stocks appealing to investors. Because of their larger capital size, these companies are more stable than small-cap. Investors can expect these companies to attain overnight success during a bullish market.

Risks:

The risk of investing in mid-cap stocks is moderate. These stocks’ response is less intense to market volatility because of their extensive capital base to deal with bad market conditions.

Liquidity:

These aren’t as liquid as blue-chip stocks because of their size, risk, and market reputation.

Should you invest in mid-cap stocks?

Mid-cap stocks are not as volatile as small-cap companies and, on the other hand, have excellent growth opportunities. You can invest in mid-cap stocks if the company’s objective matches your investment goals. Here are the reasons to invest in mid-cap companies.

Returns:

Given that most mid-cap companies are in the middle of the growth path, they have the potential to generate higher returns and pay dividends.

Ease of growth:

The middle size companies have better access to capital and market borrowings than small-cap companies, which assists in their growth potential.

Balanced risk:

These companies in the middle of a growth path potentially generate higher returns than large organisations. Also, they are more stable than small-cap. It is the reason that mid-cap stocks are moderately risky.

Affordability:

Compared to large-cap stocks, mid-cap stocks are low price, allowing investors to buy them at an affordable rate and earn good returns.

Less discovered:

Mid-cap stocks are often overlooked during their initial days, giving investors opportunities to buy them at affordable prices.

Considerable information:

Unlike small-cap companies, mid-cap stocks provide enough information to investors on their financial health and history. It makes it easier to analyse these stocks than small-cap.

Market reputation:

Mid-cap companies have earned reputations with significant growth and robust balance sheets over the years. These stocks have higher liquidity than small caps.

Advantages of Mid-cap stocks

Here are the advantages of mid-cap stocks:

• Growth Opportunities: Mid-cap stocks, having moved beyond the startup phase, offer substantial growth potential, potentially resulting in increased returns.
• Decreased rivalry: Because institutional investors are less interested in mid-cap stocks, there is less rivalry for individual investors, which presents good possibilities.
• Market Strength: Long-term investment outlooks are improved by mid-cap firms’ strong market presence and ability to grow into large-cap stocks. 
• Increased Flexibility: Mid-caps demonstrate greater adaptability to market changes, offering agility superior to large-caps, proving advantageous during economic shifts.
• Diversification: Investing in mid-caps provides portfolio diversification, mitigating the risks associated with large-cap and small-cap investments, and ensuring a balanced investment strategy.

Disadvantages of Mid-cap stocks

Here are the disadvantages of mid-cap stocks-

• Heightened Risk: Mid-cap stocks demonstrate greater volatility and entail higher risks than their large-cap counterparts, rendering them less suitable for risk-averse investors.
• Resource constraints: In comparison to bigger businesses, mid-cap companies usually have restricted financial and operational resources. This limitation may hinder their ability to navigate economic downturns successfully.
• Market Sensitivity: Mid-cap stocks’ performance can closely correspond with economic cycles, and extended market downturns may not be able to endure their financial robustness.
• Less Liquidity: Mid-cap stocks could not have as much liquidity as larger stocks, which might make it more difficult to purchase or sell large volumes of the stock without having a big effect on its price and perhaps lead to slippage.
• Restricted Analyst Attention: Generally, mid-cap stocks receive limited coverage from analysts, creating challenges for investors seeking timely and comprehensive information to make well-informed decisions.

Who should invest in mid-cap stocks?

Based on mid-cap stocks’ analysis, risks and features, investors with the following investment objectives should invest.

• Investors who seek significant capital appreciation from investment as mid-cap stocks grow exponentially to generate higher returns
• Mid-cap stocks are equity investments that require investors to stay invested long-term. An average investment period to generate returns from mid-cap stocks is seven years.
• Those with moderate risk tolerance since these stocks are more volatile than large caps and tend to generate poor returns in a bear market.
• Investors seeking portfolio diversification into an asset class to accumulate wealth.

Factors to consider before investing in mid-cap stocks

Investors of mid-cap stocks must consider the following factors before investing.

Financial health:

No matter which size stocks you are interested in, choosing companies with strong balance sheets are a primary condition. Given the unpredictability of economic trends, a strong balance sheet can help companies survive during lean periods.

Growth:

Profit and earning growth are two crucial parameters in long-term returns. Mid-cap stocks usually outperform large and small-cap stocks in the long run because of their superior growth rate in both the top and bottom lines.

Management quality:

Investors should be mindful of the quality of the management before investing in mid-cap companies. They must ensure that the management can assist the company in its growth path.

Competitive advantage:

A mid-cap company stock can perform well with a competitive edge through continuous innovation and diversification of its products or services.

High margin business:

Another important criterion to look at is the high margin of the business.

Risks of mid-cap stock investment:

There are few risks associated with mid-cap stocks.

• Value trap:

Low-ranking mid-cap stocks are prone to fall into the value trap. It’s a condition when a company continuously earns a low profit without breaking even.

• Inadequate resources:

Mid-cap companies often don’t have the infrastructure and management skills like large-caps, resulting in trapped growth.

• Result in a financial bubble:

A surge in mid-cap businesses and a good performance could result from unstable economic conditions. When the bubble pops, these are the first companies to collapse.

Alternative investment options:

If you want to earn higher returns but don’t have the risk appetite to invest in mid-cap stocks, then other low-risk alternative investment options are available.

Sovereign bonds:

Sovereign bonds are backed by the government’s promise to pay back the bondholder. These are one of the safest investment alternatives available.

Debt funds:

These funds consist of fixed income securities like debentures, bonds, and treasury bills to generate steady earnings for investors.

Balanced funds:

These funds offer portfolio diversification through equity and debt investment for moderate returns.

Large-cap:

Large-cap companies are financially stable and are capable of generating significant returns for investors.

Final words

It is critical to understand mid-cap stocks so you can plan proper portfolio diversification. You can consult market professionals regarding your investment and find the right investment mix for your financial standards.

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