What are Mid Cap Stocks?

Key Points

• A mid cap stock is a company whose market capitalization is between $2 and $10 billion. 
• These companies fall in between small-cap stocks and large-cap stocks and will often be included in the investment strategy of various equity growth funds. 
• Mid-cap companies hold more inherent risk than large cap companies but will provide slightly more stability during periods of poor economic activity in comparison to small cap companies.  
• These stocks can provide a nice boost to returns but require careful diligence given they can be more volatile than large cap peers. We typically recommend investing in mid cap stocks through a mutual fund or ETF and allowing the experts to go to work.

Some Stable Growth but still High Risk

Portfolio managers will seek mid-cap names because of their potential growth opportunities to provide alpha (a young star player) in their portfolio. 

This can be especially attractive during the early expansion phases of a cycle when interest rates are low, making the cost of capital more affordable.  

At one point in time, some of the top performing large-cap companies you have heard of now were classified as mid-cap but as their stock price rose in value and their financials strengthened with it, they entered the ranks of the blue chips.

Investors Need to complete Diligent Research

Selecting a mid-cap company requires indepth research and a higher risk tolerance due to the potential volatility that can occur for a few years. 

Over the long-term, investing in a mid-cap company with a strong business outlook that is growing their top line revenue can reward investors with superior returns compared to most other alternatives. 

While the growth prospects are attractive, it is important that at a certain point the organization begins to earn a profit on the bottom line (net income). This is because many mid-cap companies take on high levels of debt and if FCF (Free Cash Flow) is not stable this could create a difficult situation for the company during an economic contraction. 

It is sometimes best to research and invest into a mid-cap fund whether it be an actively managed mutual fund or a passive ETF.