What Are Mid-Cap Stocks?

Perusing the market for the right stock to add to your portfolio can be a tedious process. The uncertainties surrounding the economy today have forced people to become more hesitant to wade into the market. It doesn’t help when countless lists reporting on “the best stocks to buy” all seem to contradict each other.

Thankfully, the American Association of Individual Investors (AAII) knows that by providing helpful resources about the different types of stocks available, they can help people make well-informed financial choices. So, before you randomly sink your hard-earned money into “just any” investment, you’ll want to learn about how to differentiate between large-, mid- and small-cap stocks.

What Are Mid-Cap Stocks?

If you’re dissatisfied with large-cap stocks having marginal growth and less-than-satisfactory returns but are frightened by the volatility of small-cap stocks, there may be a “sweet spot.”

Medium-cap stocks, commonly known as mid-cap companies, are corporations that fall into the market capitalization category ranging from $3 billion to $10 billion. Market capitalization is determined by multiplying the number of outstanding shares by the stock’s current stock. Mid-cap market capitalization refers to a type of stock.

In contrast to small-cap companies, mid-cap stocks usually have an established business model and foothold in their respective industries and may experience rapid growth as they expand market share. A company’s market share is determined by the percentage of its total revenue or sales in a market that a company operates. For example, if there are units worth $1million sold per year in an industry, a company whose sales were $50,000 of those units would have a 5% share in that market.

Mid-cap stocks often become the target of mergers and acquisitions by large-cap companies because their growth structure is attainable at a relatively low cost. However, it’s important to remember that both small-cap and mid-cap stocks often fluctuate between the size categories that they are in, unlike larger companies. Companies that fall within the mid-cap stock category may include former large-cap companies that have fallen in size and dominance over time. That’s why it is crucial to track and analyze whether the company has fallen from large-cap status or has grown from being a small-cap company. Understanding if a medium-cap company is rapidly growing or declining will help you make smarter investment decisions. Choosing to focus on a mid-cap portfolio is an option you have as an investor.

For investors who want to diversify their portfolios, mid-cap stocks offer a well-balanced way to include companies that are focused on growth and stability.

Examples of Mid-Cap Stocks

Approximately 25% of stocks within the U.S. stock exchange are mid caps. If you’re looking for good examples of mid-cap stocks, you’ve come to the right place. In order to determine which companies may fall into the mid-cap category, there are two commonly cited benchmarks that you can investigate:

• Russell Midcap Index: The Russell Midcap index is a subset of the Russell 1000 index. The Russell Midcap measures the performance of the 800 smallest companies within the Russell 1000, which focuses on the largest companies. Because mid-cap companies are rapidly growing or declining, the Russell Midcap is recalculated each year according to its inclusion criteria to see if stocks need to be recategorized into small- or large-cap companies.
• The S&P MidCap 400 Index: In comparison, this index is managed by S&P Dow Jones Indices and only tracks around 400 mid-cap The S&P MidCap 400 acts as a barometer for the U.S. mid-cap equities sector and is by far the most widely followed mid-cap index in the U.S. Investors who follow the S&P MidCap 400 are looking for stable mid-cap stocks that will benefit them in the long term.

Some examples of mid-cap stocks include Avis Budget Group Inc. (CAR), Lendingtree Inc. (TREE), Five Below Inc. (FIVE) and Dolby Laboratories Inc. (DLB).

Advantages of Investing in Mid-Cap Stocks

Owning a few mid-cap stocks can make for a well-balanced portfolio. Some benefits of investing in mid-cap stocks include:

• Potential for growth: Although their growth potential is not as great as that of small caps, it is significantly more than that of large-cap stocks. Many mid-cap companies are still growing, which means their stocks could experience bigger gains compared to large caps.
• Less risky: Mid-cap stocks are often less risky than small-cap stocks but riskier than large-caps.
• Focused: Mid-cap companies have a broader focus, offering a larger number of products/services in numerous domestic locations than that of small-cap companies. This is because small caps often become mid caps as their businesses expand to new geographies and they can offer more services/products.
• Domestic: In contrast to large-cap stocks, mid-cap companies are less exposed to currency fluctuations or a slowdown in the global economy because they tend to stay within the domestic economy instead of expanding to international markets.
• Established: When compared to small caps, mid-cap stocks are more established and have an effective business model.

Investors often put their money into mid-cap stocks to diversify their risk. Mid-cap portfolios tend to be focused on investing in medium-sized companies. Additionally, investors who are worried about small-cap risk and volatility, but aren’t satisfied with the growth or returns of large-caps, often find a sweet spot in mid-cap stocks. This blend includes the best attributes of both small- and large-cap companies.

Disadvantages of Investing in Mid-Cap Stocks

However, as with anything, there are pros and cons to investing in mid-cap stocks. As we delve into the disadvantages of investing in mid-cap stocks, it’s important to consider your own portfolio and individual needs. This will help you determine if investing in mid caps could help you achieve your overall financial goals.

Some disadvantages of investing in mid-cap stocks include:

• Access to capital: Like small-cap stocks, mid caps may suffer from liquidity constraints due to their limited access to capital.
• Vulnerability: Unfortunately, mid-cap stocks often don’t have as much capital to sustain them through downturns or market crashes as large-cap companies have; this ultimately makes them vulnerable to severe market swings.
• Lower returns: Compared to owning small-cap stocks, which tend to outperform over the long term, investors in mid caps can experience periods of lower returns.
• Periods of volatility: Mid caps are more likely to experience large fluctuations in their stock prices compared to large caps. However, they are still much less volatile than small-cap stocks.
• Data-driven: Mid-cap stocks have far less analyst coverage than large-cap companies, which can make researching them time-consuming and difficult.
• Domestic: In this case, having a domestic-centric focus could be an advantage and a disadvantage. If U.S. economic conditions falter, mid-cap companies might suffer more than their large-cap counterparts.
• Inflation protection: Mid-cap stocks often perform well during periods of economic expansion, which occurs when there is increased activity within the economy. Also, mid caps can protect investors from negative impacts of inflation.

Overall, mid-cap stocks are the “middle child” of the stock market. They often fall under the radar, can be volatile at times, but bring balance within the household. When compared to their small-cap counterparts, mid caps are typically less risky, less volatile, and may have less growth potential. However, on the flip side, they are riskier, experience more volatility and have higher potential gains than large-cap stocks.

Whether you choose to invest in mid-cap stocks will depend on the current economy, the types of stocks you have in your portfolio, and your goals to hold stocks for the short term or the long term. Identifying mid-cap stocks for long-term investments is a strategy that can be helpful in diversifying risk. Every investor is different, that’s why it’s important to do your research and analyze your portfolio before jumping into the ring.

How Can I Invest in Mid-Cap Stocks?

As mentioned above, diversifying your portfolio with mid-cap stocks can often be a less risky option when compared to investing in small-cap companies. If you’re thinking about adding mid-cap stocks to your portfolio, there are numerous ways you can invest.

What Are Individual Mid-Cap Stocks?

If you decide to purchase individual mid-cap stocks, it’s important to do your own research and allocate funds that you can be flexible with, since mid-cap stocks tend to be more volatile and fluctuate frequently with market changes than large-cap companies. You can use AAII’s stock screens to help weed out nonviable mid-cap stocks and pick ones that have a good history of growth and profitability, strong financial health and stable, reasonable prices.

What Are Mid-Cap Funds?

Mid-cap funds are found as both mutual funds and exchange-traded funds (ETFs). A mid-cap fund is a pooled investment that focuses on companies that fall within the mid-cap stock category. These types of funds allow investors to easily and cost effectively hold a diversified portfolio of mid-cap stocks.

A mid-cap index fund provides investors with low portfolio turnover, a broad market exposure and low operating expenses. These mid-cap funds follow the benchmark index they are tied to, such as the Russell Midcap or the S&P MidCap 400, regardless of how the market is performing.

Value vs. Growth Mid-Cap Stocks

If you’re thinking about taking the plunge and investing in mid-cap companies, there are two types of stocks to consider: value and growth stocks.

Value stocks: This type of stock includes companies that are attractively priced relative to some measure of intrinsic worth—such as traditional valuation metrics like the price-earnings ratio or the price-to-book-value ratio— and consequently may provide an increased return for investors. Investors may choose to put more money into value stocks when the economy isn’t doing well or there is too much volatility; this is when value stocks tend to do better.

Growth stocks: These companies are considered to have the potential to outperform the overall market over time because of their future potential. During good economic conditions, growth stocks often modestly outperform value stocks.

Stocks of medium-sized companies that are less expensive or growing slower than other mid-cap stocks are considered mid-cap value stocks. In general, value stocks are identified by their low valuations (low price multiples) as well as their slower growth, leading to low growth rates for earnings, sales and cash flow.

In comparison, mid-sized companies that are projected to grow faster than other mid-cap stocks are considered mid-cap growth stocks. Overall, growth stocks are identified by their fast growth (high growth rates for earnings, sales and cash flow) as well as high valuations such as a high price-earnings ratio or price-to-book ratio.

Both mid-cap growth and mid-cap value stocks have a time and place for investing in them. When trying to decide if you should invest in value or growth stocks, it’s important to consider that most portfolios have room for both. Once you find the right blend of mid-cap value stocks and growth stocks, you will see how it can lead to increased diversification and overall stability. Take current market data and overall economic health information into account before deciding where to put your money.

Lastly, if you’re planning to invest over shorter periods of time, the performance of either growth or value will also depend on the point in the cycle (bull or bear market, and recession or expansion economy) that the market is in; therefore, it’s important to consider all aspects before choosing which type of stock is right for you. You will need to consider the possibility of a recession or expansion if you’re planning to choose mid-cap stocks for long-term investment.

Are Mid-Cap Stocks a Good Investment?

Because every investor has different goals, risk tolerance, time and available resources, it’s important to consider these factors before choosing if mid-cap stocks are right for you. As previously stated, diversification by having a mix of small-, mid- and large-cap stocks creates a well-balanced portfolio. However, researching and finding index funds or ETFs may be a safer route to take if you’re new to the investing world. Ultimately, it will depend on your individual investing goals.

Also as mentioned above, it’s important to consider the current market conditions before investing. If the economy looks like it may be heading into a recession, mid-cap value stocks may be a good choice; however, if we’re headed for expansion, mid-cap growth may do better. Ultimately, it will depend on various factors if mid-cap stocks are a good investment for you.

As always, do your own research, consult a financial adviser and investigate candidates using stock screeners before investing in the stock market.

Evaluating Mid-Cap Stocks With A+ Investor

We know choosing what to invest in can feel overwhelming, especially if you’re thinking about including a mid-cap strategy in your portfolio. With so many mid-cap funds and stocks to choose from, it can be difficult to know which investment strategy will fit your individual needs.

Building a well-balanced portfolio with a variety of large-, mid- and small-cap stocks can help optimize your investment potential. Because the mid-cap category tends to fluctuate depending on small- or large-cap companies are growing or declining, it’s important to stay on top of the latest information.

Thankfully, AAII’s A+ Investor subscription allows members to take advantage of financial tools such as:

• Custom stock screeners
• Stock screen power rankings
• Top and bottom performing funds
• Fund/ETF screener and compare tools
• Stock grade screens

If you’re thinking about adopting a mid-cap portfolio or sprinkling them in with a balance of small- and large-cap stocks, AAII’s resources can help you weed out nonviable contenders. These are just a few of the numerous tools you can gain access to as an A+ Investor subscriber. Sign up today to take control of your investment goals and financial education journey.