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

Updated on: Jun 30th, 2022 - 6:51:43 AM

6 min read

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Midcap stocks are shares of companies with market capitalisation between Rs 5,000 crore to Rs 20,000 crore. 

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

Midcap stocks are more volatile than large-cap stocks but less volatile than smallcap stocks. As per SEBI classification, companies ranking 101 to 250 based on market capitalisation are midcap companies. 

What are the features of Midcap Stocks?

Growth Prospects:

As midcap companies have high chances of growing rapidly in a short time, you can make profits quickly if you invest in midcap stocks. Unlike large-cap companies, these companies have not established themselves, but they are more stable than small cap companies. Midcap stocks do well in a bullish stock market. However, they can crash severely during a stock market correction. 

Diversity:

As midcap stocks fall in a broad spectrum, midcap stocks differ in terms of risk and returns. Many midcap firms are close to the development stage but offer higher stability, while some others have recently moved from the smallcap status and will take some time to realise their potential.

Risks:

Mid-cap stocks entail moderate risks as they can survive market fluctuation better than small cap stocks. However, they can outperform large-cap stocks when markets are doing well.

Liquidity:

Midcap stocks are not as liquid as large-cap stocks. However, they offer moderate liquidity as they have a decent market share and market capitalisation, unlike their smallcap counterparts.

Why invest in Midcap Stocks?

Midcap stocks are suitable for investors with higher risk tolerance and a longer time horizon. As midcap stocks can outperform large-cap stocks in a rising stock market,you can potentially earn higher returns quickly. 

Midcap companies have the potential to become large-cap companies over time. It helps if you invest in midcap stocks of companies with solid fundamentals and hold them long-term. If the market share of these companies rises quickly, then you can get a massive return in a short time. 

As midcap companies have not reached their full potential compared to large-cap firms, there is scope for rapid growth. You can diversify their portfolio with midcap stocks. It helps to stay with the investment long-term to achieve financial goals. 

Moreover, there is considerable information about the performance of midcap companies, and you can research to make a suitable investment. Midcap stocks are a good investment in a low-interest rate regime. Midcap companies enjoy cheaper financing in these times; they expand rapidly and investing in midcap stocks turns out to be profitable over time. 

What are the risks of Midcap Stocks?

Midcap stocks may crash heavily in a bear market. Moreover, they are vulnerable to short term market fluctuations, and you must invest with a longer investment horizon. Furthermore, some midcap companies may not have good management practices and solid fundamentals compared to well-established companies.  

Some midcap stocks are victims of value traps. For instance, these midcap stocks are trading at low price levels and appear cheap to investors. However, lower prices may be due to poor financials or bad corporate governance. These midcap stocks may be stuck in the value trap for years, and you will never realise decent returns in these midcap stocks. 

How to select Midcap Stocks?

Solid Financials:

You must look at midcap companies with a track record of profits. Moreover, pick midcap companies where revenues have grown consistently and have visibility of revenues going forward. 

Pick midcap companies with low debt levels on their balance sheet. Otherwise, companies will struggle to service the interest on debt during a high-interest rate regime. 

Corporate Governance:

You must select midcap companies which have sound management practices. It helps to check the promoters’ background and the level of stake promoters have in the business.

Economic Moat:

You can look at midcap companies with an economic moat. It is a competitive advantage enjoyed by the business over peers and rivals. Midcap companies with an economic moat could dominate their industry, resulting in a higher market share. For instance, some midcap companies have a sizeable market share for their businesses in India. 

Business Model:

You must invest in midcap stocks only if you understand the company’s business model. For instance, does the business have competitive advantages which can translate into a higher profit over time.

Conclusion:

  1. Midcap stocks can outperform large-cap stocks during the expansionary phase of a business cycle. 
  2. You must avoid buying overpriced midcap stocks. Otherwise, the chances of suffering losses are high if the stock market corrects.
  3. Do not pick midcap stocks based on tips from friends, relatives, social media etc.

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