Mid-Cap Stocks – What is it? Features & Risk Involved

Any stock market investor or trader would have come across the terms, large-cap, mid-cap, and small cap. These include one common abbreviation ‘cap’ which stands for ‘capitalisation’ or ‘market capitalisation’. Market capitalization, also referred to as market cap, is the net valuation of a company as per its current share price and the total number of outstanding stocks. In simple terms, it is the total market value of a company’s outstanding shares. 

Market cap helps investors and other stakeholders measure a company’s net worth in the open market. It also helps to gauge the market’s perception of the company’s future prospects. In a way, it is a reflection of what investors are comfortable to pay for the company’s stock or share. 

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Market capitalization is often used by investors to measure the relative size of one company against another. Therefore, based on market capitalization, companies can be divided into large cap, mid-cap, and small cap.

What are mid-cap stocks?

Mid-cap stocks are called so because they come in the range between large cap and small-cap stocks. Mid-cap companies are often mid to small-sized. These establishments are flexible and can easily adapt to changes. This results in significant potential to offer higher growth.

Securities and Exchange Board of India (SEBI) defines mid-cap stocks as stocks of companies that rank between 101st and 250th in terms of market capitalization.

There is a separate benchmark index for mid-cap stocks in India. It is called the Nifty Midcap 50. This index represents the top 50 commonly traded mid-cap stocks in the Indian market.

What are the unique characteristics of mid-cap stocks?

Here are some of the features of mid-cap stocks that set them apart from other market cap categories:

1. Wide range

Mid cap stock category has a wide range of stocks. Many of the mid-cap stocks may have scaled up from the small cap category. Therefore, they have higher potential to offer positive returns. Some of these stocks may also be nearing the developmental stage and therefore may end the large cap category. Such stocks can offer stable returns.

2. Medium risk levels

Mid caps are less sensitive to market fluctuations as compared to small-cap stocks. However, these may offer less stability when compared to large-cap stocks. This is the reason why mid-cap stocks come at moderate risk levels.

3. High growth potential

Mid-cap companies are often financially stable when compared to small cap companies. These companies tend to make fast business decisions for accelerated revenue growth. These companies have the potential to scale up quickly and make the business reach the next level. Thus, the stocks of these companies have better potential to generate good appreciation in the medium to long term.

4. High returns

In India, mid-cap stocks have historically fetched large profits for investors. A lot of these are also known to have rewarded investors through dividend and bonus payouts..

5. High liquidity

Mid-cap stocks offer better liquidity in comparison to small-cap stocks, as these are frequently bought and sold on the markets. With a stable business model, these stocks attract more investors, thereby providing higher liquidity.

Factors to consider

Here are some of the important factors that investors should look for while selecting mid-cap stocks:

1. Company’s financial health

Before investing in a mid-cap stock, it is important that an investor checks the company’s financial health. Company’s revenue, existing debt, etc are some of the important aspects to consider. An investor can also try to understand the company’s future plans while looking at its past performance.

Reading a company’s annual report and financial statements can give an insight into the above-mentioned factors. For instance, if a company’s liquidity and current ratio are not in line with industry standards, chances are that the company may face a financial crunch in the near future. 

2. High annual revenue growth rate

For identifying the best mid-cap stocks, investors should look for companies that have high revenue and earnings. These companies also have the potential to offer higher capital appreciation in the medium to long term. 

3. Management quality

A company’s management is its backbone and the company’s performance is often highly impacted by the working pattern of its management. Hence, before selecting a mid-cap stock, an investor should carefully consider below factors:

• Promoter’s background
• Level of stake that promoters have in the business

4. High margins

To identify the best mid-cap stocks, investors should look for a business with high margins. Companies may have high margins if there is low competition or if they enjoy operational efficiency. 

5. Competitive advantage

Another important factor to consider while searching the best mid-cap stocks is to study the competitive edge of the business over its competitors.

What are the alternatives to mid-cap stock investment?

Investors who are seasoned stock market players and have a medium to high-risk appetite can explore good mid-cap stocks directly. However, investors who lack market knowledge or expertise to select the right mid-cap stocks can go for mid-cap mutual fund investments. According to SEBI guidelines, mid cap mutual funds are required to invest at least 65% of their funds in mid-cap stocks. These funds have historically generated better returns as compared to large cap mutual funds.

Investors who have a low-risk appetite can explore investment options such as debt mutual funds, balanced funds, etc which come with low risks and are ideal for short to medium-term goals. 

Are there any risks involved?

Here are some of the risk factors associated with mid-cap stocks that investors should be aware of:

1. Volatility

Most mid-cap companies tend to be highly dependent on one line of business. These are also often highly dependent on a small segment of customers. During high market volatilities, mid-cap stocks are more susceptible to price shocks. This means an immediate impact on investor returns.

2. Limited choice

The mid cap stock segment mostly sees a shortage of opportunities in the market. Among the limited options, it can be difficult for investors to pick the right stock. In comparison, large cap and small cap segments offer more options to choose from.

3. Speculative nature

A mid cap stock may perform exceptionally due to market speculation of further rise in prices. However, many mid-cap companies may lack the financial strength to sustain the speculation. This is why investors must do a detailed analysis of the company’s past financial strength to estimate its future growth.

Conclusion

To conclude, investors looking to invest in mid-cap stock should take investment decisions as per their risk appetite and personal financial goals. It is advisable that investors with a high-risk profile and long investment horizon should consider mid-cap stock investments because these stocks tend to be highly volatile in the short run.

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