Mid Cap Stocks – What Are Mid Cap Stocks, Features & How to Select Mid Cap Stocks

Market capitalisation is calculated by multiplying the company’s current share price by the total outstanding shares. For example, if a company issues 10 Lakh shares at Rs 1,000 each, its market capitalisation is Rs 100 crore. 

What Are Mid Cap Stocks?

Midcap stocks are shares of companies with a market capitalisation between Rs 5,000 crore and Rs 20,000 crore. Midcap stocks are more volatile than large-cap stocks but less volatile than small-cap stocks. According to SEBI classification, companies ranking 101 to 250 in the Nifty index based on market capitalisation are midcap companies. 
Nifty also has a benchmark mid-cap index in India called the Nifty Midcap 50, which hosts the market's top 50 most traded mid-cap securities.

What are the features of Midcap Stocks?

1. Good Growth Potential

Mid-cap companies are still growing and expanding, which allows them to provide better returns over time than large, fully established companies.

2. Fair Risk

Mid-cap stocks are less risky than small-cap stocks, but a little riskier than large ones. So they offer a balance that is neither too safe nor too risky.

3. Liquidity

Mid-cap stocks are frequently traded, making it easy to buy or sell them in the market without too much worry.

4. Diversity

These companies come from various industries in various sectors like tech, pharma, manufacturing, etc. This makes it easier to build a diversified portfolio within mid-caps itself.

5. Growth potential  (Chance for Better Returns)

Since these companies are still growing, they can perform well over the long term and may become tomorrow’s large caps if chosen perfectly.

Why invest in Midcap Stocks?

Mid-cap stocks are shares of companies that are still growing but have already crossed the startup stage. These companies usually have strong business potential and are working to become the large players in the market. Since they’re in the active growth phase, mid-caps can deliver higher returns than large-cap stocks, especially when the overall market is positive and doing well. Many of them have solid, strong financials, and if chosen wisely, they can turn into tomorrow’s large-cap companies, giving early investors a significant advantage with time.

Mid-cap stocks are more engaging because they often give more value for money and are not tracked and valued as closely by big investors or analysts. This means that there’s room to spot hidden gems early. Also, most companies share enough financial data to help investors make better decisions. With moderate risk levels, liquidity, and a wide variety of sectors, mid-caps are an excellent option for long-term investors who want to grow their wealth while keeping their portfolio well-balanced.

What are the risks of Midcap Stocks?

Mid-cap stocks have significant growth potential but carry considerable investment risks. One prevalent issue is the value trap, which occurs when a business appears appealing on the surface but consistently displays poor cash flow and low earnings. These mid-cap firms might not grow or profit, resulting in subpar returns or, in rare circumstances, total company failure. This can perplex investors, but the company isn't getting better even though the stock appears cheap.

Another risk with mid-cap stocks is their limited financial strength and operational capability compared to large caps. They might not have experienced leadership or the infrastructure to manage quick growth. Also, some companies may show strong short-term financial performance due to market hype, creating speculation. When that bubble bursts, the stock price can fall sharply. So it's essential to research a company’s past financials, management, and proper growth before investing in mid-cap stocks for the long term.

How to select Midcap Stocks?

Selecting the right mid-cap stocks requires careful evaluation of the company’s financial performance, business fundamentals, and long-term potential. Below are key points to keep in mind before investing:

Review the Company’s Financial Strength
Always begin by checking the company’s financial performance. Look into the revenue growth, profit margins, debt levels, and cash flow. A good balance sheet indicates that the company is financially strong and capable of long-term growth.
An Analysis of Stock Performance
Choose stocks with a consistent record of profitability and solid return ratios, such as Return on Equity (ROE) and Return on Capital Employed (ROCE). These ratios show the company’s capacity to manage shareholder money efficiently.
Understand the Business Model
A proper, scalable business model is essential. Companies that expand into new markets or introduce new products/services are more likely to grow in value over time.
Assess the Quality of Management
Look for companies with experienced and trustworthy management. A good management team is crucial in strategic decision-making and driving the company’s future growth.
Study Industry Trends and Growth Potential
Consider if the company operates in a high-growth or emerging sector. Businesses that align with strong market trends usually perform better and have good long-term returns.
Identify Competitive Advantage
A mid-cap company with a strong competitive edge, such as a recognized brand, cost advantage, or innovation, probably succeeds in a competitive market.
Evaluate Stock Valuation
Remember to compare the stock’s valuation with that of industry competitors. Use standard measures like Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios to ensure you're investing at a reasonable price or that it's overvalued or undervalued.

Conclusion

Mid-cap companies can give substantial gains, particularly when chosen carefully during favourable market conditions. However, like with any investment, it's critical to concentrate on trusted research, reasonable valuations, and the company's core capacities. Steer clear of market noise and refrain from making snap decisions. Mid-cap stocks can complement your wealth-building path if you have the proper approach and patience.