What Is Mid-Cap?

What Is Mid-Cap?

Let me explain mid-cap to you directly: it's the term for companies with a market capitalization—or market value—between $2 billion and $10 billion. As you'd guess from the name, these mid-cap companies sit right in the middle between large-cap (big-cap) firms and small-cap ones. Remember, these classifications like large-cap, mid-cap, and small-cap are just approximations of a company's current value, and they can shift over time.

Key Takeaways

Here's what you need to know upfront: mid-cap applies to companies valued between $2 billion and $10 billion in market cap. One reason these companies appeal is their potential to grow, boosting profits, market share, and productivity—they're smack in the middle of their growth phase. Plus, mid-cap stocks are great for diversifying your portfolio, as they offer a solid mix of growth opportunities and stability.

Understanding Mid-Cap

Companies raise capital through debt or equity, and you should understand that debt gets paid back but often at lower costs due to tax benefits, while equity is pricier but doesn't require repayment in tough times. That's why firms aim for a balanced capital structure, and looking at equity structure can reveal a lot about their growth prospects.

To get a sense of that, calculate market capitalization—it's one key way to gauge a company's size and depth. Small-caps are under $2 billion, large-caps over $10 billion, and mid-caps fill the $2 billion to $10 billion range. We've even got categories like mega-cap (over $200 billion), micro-cap ($50 million to $500 million), and nano-cap (under $50 million) for more precision.

As an investor, you might find mid-caps appealing because they're poised for growth in profits, market share, and productivity during their growth curve. They're less risky than small-caps but riskier than large-caps. Keep in mind, if a mid-cap succeeds, its market cap could rise—often from share price increases—and push it out of the mid-cap category.

Don't confuse stock price with market cap; a company with shares above $10 isn't automatically mid-cap. Market cap is current price times outstanding shares. For instance, if a company has 10 billion shares at $1 each, that's $10 billion market cap. Another with 1 billion shares at $5 has $5 billion—even with the higher price per share, it has fewer shares overall.

Advantages of Mid-Caps

Financial advisors often tell you to diversify your portfolio with a mix of small-, mid-, and large-cap stocks to minimize risk. Some investors use mid-caps specifically for that diversification. Small-caps give the highest growth but with the most risk, large-caps provide stability but slower growth, and mid-caps strike a balance between the two.

You can't predict when the market will favor one size over another, so diversification is key. The amount of mid-caps you include depends on your goals and risk tolerance.

That said, mid-caps have clear advantages. In low-interest-rate environments with cheap capital, they can secure the credit needed to expand and thrive during business cycle upswings. They're not as volatile as small-caps, so they hold up better in economic turbulence. Many are well-established, focused on a single business, and have carved out a market niche. Being riskier than large-caps, they might deliver higher returns, which could suit you if you're comfortable with that level of risk.

You can invest in mid-caps by buying their stocks directly or through a mid-cap mutual fund that specializes in them.