Mid-cap stocks sit between small-cap stocks and large-cap stocks. They are one of the three types of stocks based on market value or market capitalization. Furthermore, they are also abundant in the stock market and notable stock indices, as well as part of pooled funds such as equity index funds and balanced funds. This article lists and discusses the pros and cons or advantages and disadvantages of investing in mid-cap stocks.
A Look Into the Advantages and Disadvantages of Investing in Mid-Cap Stocks
Pros: Advantages of Mid-Cap Stocks
Note that mid-cap stocks are issued and traded by companies with a market value or market capitalization of between $2 billion and $10 billion. The value varies according to the geographic market. Nonetheless, as mentioned, they are larger than small-cap stocks but smaller than large-cap stocks. The following are the specific advantages of mid-cap stocks:
1. Established and Further Improving Business Model
One of the advantages of investing in mid-cap stocks, especially when compared with small-cap stocks, is that the issuing medium-sized companies have successfully navigated through the challenges that confront startups and other smaller companies. Hence, for investors, this means that they have a demonstrated level of staying power and have higher chances of long-term survival through an established business model that can be improved further. The risk of investing in mid-cap stocks is lower than in small-cap investing.
2. Prospects for Substantial Growth in Investments
Mid-cap companies can grow further and become large-cap companies in the future. Data from Standard & Poor Dow Jones indices from 1994 to 2019 showed that several mid-cap companies listed in the S&P MidCap 400 Index tend to have a stronger performance compared with large-cap companies listed in S&P 500. The same index has also fared better than the small-cap companies listed in the S&P SmallCap 600 Index. The growth potential of medium-sized companies is more substantial than both large-sized and small-sized companies. Investing in key mid-cap stocks can bring forth a significant level of capital appreciation in the long run.
3. Less Exposed to Global Risks than Large-Cap Stocks
Another advantage of mid-cap stocks is that they are less exposed to risks associated with global issues and crises that large-cap stocks tend to experience. Most medium-sized companies generate most of their revenues from domestic sales or domestic operations. Hence, when compared with larger multinational companies, medium-sized companies with businesses restricted in a particular geography are better insulated from slowdowns in foreign markets, disruptions in global trade, and overall global economic downturns.
Cons: Disadvantages of Mid-Cap Stocks
Medium-sized companies can still experience uncertainties and some level of instability, especially when compared with large-sized companies. Their businesses remain threatened by new entrants and larger organizations aiming to enter their respective markets. The following are the specific disadvantages of investing in mid-cap stocks:
1. Still Riskier and More Volatile Than Large-Cap Stocks
Investing in mid-cap stocks is riskier than investing in large-cap stocks. Similar to small-cap stocks, these stocks are more suitable for ultra-aggressive investors. In addition, they experience more volatility as characterized by drastic movements in their stock prices. Most medium-sized companies also tend to perform not as well as larger companies in the short-term and medium-term in terms of investment returns. Holding large amounts of mid-cap stocks can fundamentally
2. Notable and Common Issues of Medium-Sized Companies
Another disadvantage of mid-cap stocks is that medium-sized companies have drawbacks when compared with larger companies. For example, they do not have as much resources needed to sustain them during downturns. They are not as established as larger companies, thereby making them vulnerable to the buying powers of suppliers and consumers, competition in the labor market, limitations in access to capital, impact and relevance of marketing communications from other competitors, and the overall intensity of industry rivalry.
Important Pointers Before Investing in Mid-Cap Stocks
The prospect of faster growth makes small-cap stocks and mid-cap stocks attractive to investors. The aforementioned advantages of mid-cap stocks make them ideal for investors who are aiming to grow their investments as fast as possible. However, buying and holding these stocks do not guarantee the aforementioned advantages or benefits.
With high and faster returns come higher risks. Medium-sized companies have disadvantages over larger companies. Hence, before investing in mid-cap stocks, an investor needs to go through and answer several pertinent guide questions to aid his or her investment decisions. Remember that mid-cap stocks are ideal for ultra-aggressive investors.