Mid-cap stocks occupy an interesting middle ground in the investment world. They are large enough to have proven business models but small enough to still have significant growth potential. In this guide, we will explain what mid-cap stocks are and why they deserve a place in your portfolio.
What Are Mid-Cap Stocks?
Mid-cap stocks are shares of companies with market capitalizations typically between $2 billion and $10 billion. They fall between the stability of large-cap blue chips and the growth potential of small-cap stocks.
Market cap categories: Large-cap: $10 billion+, Mid-cap: $2-10 billion, Small-cap: $250 million - $2 billion. These ranges can vary slightly depending on the source.
Characteristics of Mid-Cap Stocks
- Proven businesses: Unlike startups, mid-caps have established products and revenues
- Growth potential: Still small enough to grow significantly faster than giant corporations
- Less analyst coverage: May be overlooked by Wall Street, creating opportunities
- Acquisition targets: Often bought by larger companies seeking growth
- More volatile than large-caps: But less volatile than small-caps
- Often domestic focus: Many mid-caps have not yet expanded internationally
Benefits of Mid-Cap Investing
1. Growth and Stability Balance
Mid-caps offer a sweet spot: they have proven themselves as viable businesses but still have room for substantial growth. This balance can provide better risk-adjusted returns than either extreme.
2. Historical Outperformance
Over long periods, mid-cap stocks have often outperformed both large-caps and small-caps. They capture much of the growth potential of small-caps while having lower bankruptcy risk.
3. Acquisition Premium
Mid-cap companies are attractive acquisition targets for larger corporations looking to expand. When acquisitions happen, shareholders typically receive a premium over market price.
4. Less Competition for Good Ideas
With fewer analysts covering mid-caps, careful investors may find mispriced opportunities that would be impossible among heavily-analyzed large-caps.
Mid-Cap Success Story
Many of today's largest companies were once mid-caps:
- Netflix was a mid-cap before streaming exploded
- Salesforce grew from mid-cap to large-cap over a decade
- Many pharmaceutical companies were mid-caps before blockbuster drugs
Identifying tomorrow's large-caps while they are still mid-caps can generate significant returns.
Risks of Mid-Cap Investing
Higher Volatility
Mid-caps are more volatile than large-caps. During market downturns, they can fall more sharply.
Less Liquidity
Smaller trading volumes can make it harder to buy or sell large positions without affecting prices.
Resource Limitations
Mid-caps have fewer resources than large-caps to weather extended economic difficulties.
Key Person Risk
Mid-cap success often depends heavily on a few key executives. Losing key talent can significantly impact performance.
How to Invest in Mid-Cap Stocks
Individual Stocks
Research and select specific mid-cap companies. This requires more work but allows you to focus on your best ideas.
Mid-Cap ETFs and Index Funds
Popular options include:
- S&P MidCap 400 Index funds: Track 400 mid-sized US companies
- Russell Midcap Index funds: Another broad mid-cap benchmark
- Mid-cap growth ETFs: Focus on faster-growing mid-caps
- Mid-cap value ETFs: Focus on undervalued mid-caps
Actively Managed Funds
Some active managers have strong track records in the mid-cap space, where less analyst coverage may create more opportunities for skilled stock pickers.
Mid-Cap Allocation Strategies
Core Portfolio Addition
Add mid-cap exposure (10-20%) to a core large-cap or total market portfolio for additional diversification and growth potential.
Small/Mid-Cap Blend
Combine small and mid-cap exposure for a higher-growth allocation with moderate risk.
Style Diversification
Split mid-cap allocation between growth and value styles for broader exposure.
Track Your Mid-Cap Investments
Pro Trader Dashboard helps you monitor your portfolio, track mid-cap performance, and analyze your overall allocation strategy.
Summary
Mid-cap stocks offer an attractive combination of growth potential and established business fundamentals. They can enhance portfolio returns while adding diversification beyond large-cap holdings. Whether through individual stocks or low-cost index funds, mid-cap exposure deserves consideration in a well-constructed investment portfolio.
Want to learn more about stock categories? Check out our guides on blue chip stocks and growth stocks.