Home Beginner Market Structure Understanding The Basics Of Market Capitalization – Mid Cap

Understanding The Basics Of Market Capitalization – Mid Cap

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Introduction

The stock market of a country is classified based on their market capitalisation and sector they belong. Small- cap, Mid-cap, and Large-cap come under market capitalisation. In recent years, mega-cap, micro-cap, and nano-cap have been added to the classification as well. Market capitalisation is the total market value (in dollars) of the outstanding shares. It is commonly referred to as market cap as well. Going forward, we will discuss only mid-cap companies.

What is Mid Cap?

Cap is derived from the term capitalisation, and the prefix given to it refers to the size of the company. As the name suggests, mid-cap companies are the companies that come in between small-caps and large-caps. If their market capitalisation is between \$2 billion and \$10 billion, such companies are referred to as mid-cap companies. Well, this is not fixed. The market capitalisation varies over time, and companies move from mid-cap to small-cap or large-cap. The market capitalisation is calculated as the mathematical product of the stock’s current market price and the total number of shares it has. For example, if the current share price of a company X is \$5 and the total number of shares is 1 billion, it’s market capitalisation would be \$5 billion. Hence, falling under the mid-cap category.

Also, note that the share price is not the factor that determines the market capitalisation, but, the number of shares is the significant parameter that determines the market capitalisation of the company. For example, company Y has a current share price of \$10 has 200 million shares; its market capitalisation will be \$2 billion. Therefore, even though the share price of company Y is more than company X, it’s market capitalisation is lesser than company X because it has only 200 million outstanding shares with it.

The most attractive feature of mid-caps is that these stocks usually provide good returns with less risk. So, this attracts many investors to invest in these mid-caps. These are the companies that are in their stage, so investors study these mid-cap stocks and look forward to investing in the companies which have a high probability of developing well in the coming future.  Comparing mid-caps with large-caps and small-caps, they don’t usually provide returns as much as small-caps but do provide a return better than the large-cap stocks. Coming to the risk factor, they are less risky than the small-cap companies as they are more developed than the small-cap companies as well. However, they are not as safe as large-cap stocks. Hence, the name ‘mid-cap.’

Advantages of investing in Mid Cap companies

A portfolio must be well-diversified with all kinds of stocks. Having a higher percentage of mid-caps in the portfolio can be the right choice. The reasons for it are as follows:

Performance during the expansion phase: During the expansion phase, Mid-cap companies seem to do very well by providing good returns to its investors.

Relatively better than Small Caps: comparative to small-caps, mid-caps are not as risky as small caps and are a safe form of investment. During an economic crisis, the mid-cap companies do not go bankrupt, unlike the small-cap companies. Mid-caps are more developed and known in the market compared to small-caps; hence, more investment-related information can be obtained than the small-cap companies. Also, during the launch of a new product, they tend to give the same return as that of a small-cap but with lesser risk in hand.

Mid-cap turned Large Cap: If a large-cap company buys a mid-cap company, the company would now be converted into a large-cap company. If this switch has a good effect, the company’s stock is seen to outperform, which in turn generates a good amount of gains to its investors.

Historic trend: In the US, over the last ten years, mid-caps have outperformed both small and large-caps. Mid-caps are like a fusion of small-caps and large-caps. Lower risk than small-caps and better returns than large-caps have been one of its traits. Hence, this is the reason which can be accounted for its outperformance over the years.

Lastly, when the mid-caps tend to see stable growth when the interest rate is low, and capital is inexpensive. Also, the mid-cap companies can get credit for its growth, which results in an excellent performance of a stock in the expansion phase.

Therefore, investing in mid-caps is an excellent way to diversify and improve one’s investment portfolio. If investors find it challenging to research the stocks, they can put their capital into the mid-cap mutual funds which give them more confidence in safety and risk control as it is managed by fund managers who are well equipped with the knowledge of the market.

Mid Cap indexes and ETFs in the US

Mid-Cap being the second largest in terms capitalisation, it is necessary to have an index to keep a watch on how the mid-cap companies are performing.  Hence, S&P Mid-Cap 400 is a mid-cap index in the US which contains 400 mid-cap companies in the US. The Russell Midcap and Wilshire US Mid-Cap index are the other two mid-cap indexes. The Russell Midcap uses 200th through 1000th largest companies contained in the Russell 2000 index. Similarly, the Wilshire US Mid-Cap index uses 500th through 1000th companies from the Wilshire 5000 index. Coming to the ETFs, there are two large ETFs that track the S&P Mid-Cap 400 index, namely, the SPDR S&P MidCap 400 ETF and the Vanguard S&P MidCap 400 ETF.

Mid Cap indexes and ETFs in Europe

The STOXX Europe Mid 200 Index is a mid-cap index in the Euro area which is designated to provide a representation of the mid-cap companies in Europe. This index is derived from the STOXX Europe 600 Index. Some of the countries that include in the index are Austria, France, Germany, Italy, Spain, Sweden, Switzerland, the United Kingdom, etc. The MSCI Europe, Mid Cap Index, is another index that is composed of the mid-cap companies in the Euro Zone.

The iShares STOXX Europe Mid 200 UCITS ETF and the Invesco STOXX Europe Mid 200 UCITS ETF are two well-known ETFs which keep a track on the STOXX Europe Mid 200 Index. Investors looking forward to investing in the mid-cap companies can consider investing the ETFs mentioned above as these perform very similar to the mid-cap indexes.

Disadvantages of investing in Mid Caps

In a bull market, most of the sectors, including the mid-cap sector, perform well. However, during a bear market, these mid-caps usually see a significant fall in the market. But this is not the case with some large-cap stocks. They see a minor correction but do not fall as drastically as mid-cap stocks. Coming to returns, their return is less than small-cap stocks, most of the time Also, during an economic crisis, when the market sentiment is dropping; the mid-caps observe a dip which can hurt the investors. As they have a smaller capital base (number of outstanding shares) than large-caps, these stocks suffer liquidity constraints.

Mid Cap stocks vs. Mid Cap mutual funds: Which one of them is a better investment choice?

Before investing individually in the mid-cap stocks, one must keenly examine the details about the stock. These stocks, unlike the large-cap stocks, are quite risky, so, the right amount of research has to be done before stepping into a mid-cap stock. On the other hand, Mutual funds managers have an immense amount of knowledge on the companies and know inside out of business. Hence, it is safer to choose a mid-cap mutual fund over direct investment. Therefore, healthy research from the investor and a good mutual fund can reduce many risks and also help to provide better gains.

I am Reddy Shyam Shankar Garla. I am a Professional FOREX trader, Cryptocurrency Analyst, Blockchain Vehement, Professional Poker Player and Real Estate Investor. I am managing Asset Management Platform named Hashloops LLP.