invest mid cap stocks

Should you invest in mid cap stocks?: When we look at the historical data of mid cap index of BSE and NSE, it is obvious that the mid cap stocks have outperformed the large cap stocks over time. Mid cap stocks represent the medium sized companies. In this post, we discuss reasons as to why mid-cap are doing better than large caps and are they better investment opportunities than the large cap stocks in the market.

When we rank the stocks in the market on the basis of their full market capitalization, mid cap stocks find their place in between large cap stocks and small cap stocks. As per the methodology followed by BSE, companies that form part of the 70% of the total market capitalization on BSE are large caps and the stocks that have the next highest market capital accounting for about 15% of the total market cap are mid cap stocks. In case of NSE, stocks that are ranked between 101 and 250 in terms of full market capitalization are considered as mid cap stocks.

What makes mid cap stocks so attractive?

Less coverage:

Mid cap stocks do not receive the more financial coverage by media or the market trackers. Unlike the large stocks that are tracked very extensively by the market players, mid and small cap stocks don’t find their place in the limelight. This lack of knowledge of the well performing mid cap stocks in the market makes it a point to consider investing in mid cap stocks that will grow over time producing very good returns.

Greater growth potential:

Companies that have established their name and growing would typically be mid cap stocks having very high growth potential in the future. This gives a greater share price appreciation prospects making mid cap very attractive stock to invest.

Higher value during transition into large cap:

Successful mid cap companies grow over time along with increasingly raising market share of their business. They grow their volumes and outperform the most of the large stocks earning high profit margins. This is when they would attract the larger media coverage bringing the attention of institutional investors and other high net worth investors. This phenomenon will lead to sudden surge in the share price as a result of increased demand for the stock. This can be best viewed as transition of mid-caps into large cap stocks.

Less riskier than small caps:

Today’s mid cap stocks are yesterday’s small caps. In a sense, they have grown their volume and transformed themselves as mid-cap stocks. This is the best evidence to assess the future growth prospects of the mid cap stocks. If the same growth continues to take place, then they could even find their place in large cap list in the future. Together, all these make the mid cap stocks less risky than small caps. Those who consider the option of investing in small caps alone can think of buying some well performing mid cap stocks also.

Caution before you pick mid-cap stocks:

However promising they are, mid-cap stocks should be consider for investment only after thorough review of their fundamental position and business prospects. Most of the mid cap firms tend to have more debt in their capital structure. At times, the illiquidity of the mid cap stocks will make it difficult for the investors to exit. Also, the sudden exits of the large and institutional investors may adversely affect the stock price. Though the fact that they have grown from small cap to mid-range is an assertion of their potential, it is always better to diversify your portfolio without going all on mid cap.

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