A share of a company’s ownership is referred to as its “stock.” The value of each share is determined by the total value of the company. When you purchase shares in a company, you are essentially purchasing a small part of a public corporation.
When people start investing in stocks for the first time, they often have questions about which stocks to buy. Even a seasoned investor can feel overwhelmed by questions like these. Investors in the stock market need to know enough about stocks to know which ones are best for their investment strategy. If you don’t know how to choose which stocks to buy, you could lose money. There are risks in the stock market, and these risks vary from stock to stock.
Stocks on the stock market are often divided into large-cap stocks, mid-cap stocks, and small-cap stocks based on their market capitalization (or market cap). This sorting helps investors make smart choices about where to put their money. This article will help you understand how largecap, midcap, and smallcap stocks are different.
But first, let us briefly understand the concept of market capitalization
To clarify, let’s examine the definition of market capitalization with the help of an illustration. Suppose XYZ Company has 10,000 outstanding shares and each share is valued at Rs 10 on the market. Then, ABC Company’s market capitalization will be computed as follows:
Outstanding shares multiplied by the share price
10,000 × 10 = Rs 1,00,000
Therefore, XYZ Company’s market capitalization is Rs 1,00,000.
There are three main types of companies that are traded on stock exchanges: large-cap, mid-cap, and small-cap. Let’s find out more about mid-cap companies and the stocks which are categorised as mid-cap stocks.
What are Mid-Cap stocks?
Mid-Cap Stocks are shares or equity of mid-cap companies. To better understand the concept we need to take a look at mutual fund classification from a holistic per.
According to SEBI, a large-cap firm is any listed company that is rated between 1 and 100 in terms of market capitalization on the Indian stock exchanges. Mid-cap companies are listed from 101 to 250, and small-cap companies begin with the 251st ranked company. Practically at present, companies with a market worth of more than Rs 5,000 crore but less than Rs 20,000 crore tend to be classified as mid-cap companies. Compared to investing in large-cap market corporations, investment in these companies can be riskier relatively. This is a result of the higher volatility of mid-caps. On the other hand, over time, mid-cap firms also have the potential to develop into large-cap firms. More investors are drawn to investing in these companies because they have a better growth potential than large-cap equities.
Mid-cap companies that are listed on the Indian stock exchanges include Metropolis Healthcare, Castrol India, and LIC Housing Finance.
It would be incomplete to understand the concept of mid-cap companies without getting into relative comparison with large-Cap stocks and small-cap stocks.
Large-cap companies are well-established businesses with a considerable market share. Large-cap enterprises have market capitalizations of above Rs 20,000 crore. These companies dominate the market and are very stable. They maintain their composure amid recessions and other adverse events. Moreover, they often have been operating for decades and have a solid reputation. If you want to invest in firm stocks with less risk, large-cap stocks are an excellent choice. These companies have lower volatility than mid-cap and small-cap companies. Their less volatile nature minimizes their risk.
Reliance Industries and Infosys are two instances of large-cap market firms listed on India’s stock markets. Their market dominance and continuous performance make them excellent selections for long-term investors.
Companies with a market capitalization of less than Rs 5,000 crore are considered small-cap. These businesses are comparatively smaller in size and offer substantial expansion potential. They are risk-prone due to the limited likelihood that they will be effective over time. This makes the stocks of these firms very volatile. Small-cap firms have a long record of underperformance, but when an economy emerges from a recession, small-cap stocks often thrive.
Examples of small-cap market firms listed on India’s stock markets include Hindustan Zinc, DB Corp, KNR Constructions, and Hathway Cable.
What are Mid-Cap Stocks Features?
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Diverse Range
The “mid-cap” stock category encompasses a diverse group of companies. It’s possible that many of the stocks in the mid-cap category started out in the small-cap segment and worked their way up. Because of this, they have a greater potential to provide profits. It’s also possible that some of these companies are getting close to the development stage, and as a result, they may leave the big size group soon. These stocks have the potential to deliver consistent gains.
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Risk
When compared to small-cap equities, the level of volatility experienced by mid-size companies is far lower. However, as compared to large-cap companies, the volatility of mid-cap equities is much higher. As a consequence of this, the returns are greater than those offered by large-cap equities if the market is in a bullish trend or under favorable conditions. On the other hand, when the market is in a downward trend, returns will be much lower in comparison to large-cap companies.
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Growth Potential
Compared to small-cap companies, mid-cap companies are often financially stable and secure. These businesses have a propensity for making fast business choices to drive revenue expansion. These companies have the potential to expand rapidly and propel themselves to the next level. Thus, the stocks of these companies have a greater potential for medium-to-long-term gain.
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Liquidity
Small-cap stocks are less known than mid-cap stocks. Therefore, investors are more at ease investing in mid-cap enterprises. Compared to small-cap stocks, mid-cap stocks have a higher level of liquidity. Because they are relatively well-known and popular, buying and selling stocks is easier on the stock market. As a result, mid-cap stocks offer investors considerable liquidity.
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Returns
Mid-cap stocks have historically generated substantial returns for investors in India as compared to large-cap stocks in the recent past (since 2017). Many of these are also known to have paid dividends and bonuses to investors.
Why Should You Invest in Mid-Cap Stocks?
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Potential Of Good Returns
It bears repeating that top mid-cap stocks historically since 2017 had a strong growth rate as and have beaten large-cap. Potentially they can provide investors with a good return on their investment. This is because they are capable of expanding at a faster pace than their largecap competitors who are already too large and have already seized a considerable share of the market they operate in.
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Reasonable Price
Large-cap stocks are available at a premium price as compared to mid-cap stocks. This implies that you can purchase mid-cap stocks for a much lower cost while still getting stocks that have the potential to give good returns. Another benefit is that typically mid-cap stocks are affordable for all types of investors. These are essentially greater potential equities that frequently go overlooked by the market’s major players.
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Medium Risk
Reiterating the fact that mid-cap stocks have lower risk than large-cap stocks, the potential of better returns than large-cap equities, and greater stability than small-cap companies. These stocks are more likely to be able to raise money through credit and hold up better under unfavorable market conditions.
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Market Reputation
Mid-Cap Companies develop a reputation as profitable businesses with strong balance sheets and consistent dividend payouts over time in the market. Additionally, because they are traded frequently on the stock market, there is more liquidity and the possibility for value growth. All company-related information available on mid-cap companies, such as past performance statistics in comparison to benchmark indices and other companies is available in the public domain. Therefore, before making an investment, you can assess the financial standing and track record of these stocks.
What are the Risks Associated with Mid-Cap Stocks?
Most mid-cap firms are typically primarily dependent on a single business segment. These companies are also typically very dependent on a limited customer segment. When market volatility is strong, mid-cap equities are more prone to price fluctuations. This has an immediate effect on the returns of investors.
A mid-cap stock may exhibit outstanding performance if the market shows a bullish trend. However, it is possible that a mid-cap company may lack the financial strength to maintain the performance shown during the bull run in the long run. For this reason, investors must do a comprehensive review of the company’s historical financial health in estimating its future growth.
As we have mentioned before, mid-cap stocks are more volatile than large-cap stocks, not only because they have a smaller market capitalization and fewer revenue resources, but also because they are not as established as large-cap companies. They may lack the managerial infrastructure and organizational management of their large-cap competitors, preventing them from maximizing the substantial returns they obtain. Consequently, if they are unable to preserve the value appreciation, they may fail in a bear market.
In addition, the markets are volatile and can result in a financial bubble if some mid-cap stocks generate substantial returns. When the bubble breaks, it may no longer seem so lucrative. They may also fall victim to a value trap if they continue to operate with low earnings and insufficient cash flow. In this case, they may ultimately fail.
What are Some Alternative Options to Mid-Cap Stocks?
Long term investment options
- Mutual Funds: Most investors do not have the stomach or expertise to directly indulge into stocks. Especially, beginners or novices who invest in multiple stocks due to FOMO i.e fear of missing out during a bull run in the market. People with limited financial knowledge can start their investment journey through investment in diversified financial instruments such as large cap mutual funds, debt funds, index funds, gold exchange-traded funds, real estate investment trust units, bonds, etc. People who do not have the required knowledge to pick the right mid-cap stocks can invest in mid-cap mutual funds, through zero commission platforms such as Kuvera. There are ample mid-cap funds managed by reputed asset management companies, and financial experts do the heavy lifting to create a balanced and diversified portfolio based on their experience in the market. Some of them are even sector-specific such as Mid-cap IT funds, which specifically invest in IT sector-related stocks.
- National Saving Certificate (NSC): Indian post offices and particular banks offer NSCs as a viable long-term investment alternative. The term period is five years, and the minimum initial investment is 100 rupees. This investment plan’s great feature is that it is inexpensive and applicable to investors of all economic backgrounds.
- National Pension System (NPS): The Indian government established a pension plan as a long-term investment opportunity. It provides investors with a monthly income after retirement. A person can invest in this plan until age 60, at the age of 60 the person who has invested in the National Pension System (NPS) will get back 60% of his returns back as a lumpsum tax-free amount if he elects to purchase an annuity plan with the remaining 40% even that amount will be tax-exempt.
- Gold: In India, gold is regarded as one of the best asset classes. Indians initiated this practice of investing in gold many years ago, and it is still continued in many Indian families to this day. Gold is a long-term investment option. Investing in gold can take any form, including the purchase of real gold, gold deposit schemes, gold exchange-traded funds, and gold mutual funds.
Short Term Investment Options
- Fixed maturity plans: They are closed-end mutual funds that primarily invest in fixed-income assets with linked maturities. The maturity phase might be anything between one month and five years. The primary benefit of a plan with a fixed maturity is that it can provide a constant return over time.
- Debt Mutual Funds: It is a good option for investors interested in investing in debt. These are typically open-ended funds designed for investors with a low-risk tolerance. Debt mutual funds are the most secure investment vehicle that guarantees significant returns. The majority of the funds are invested in high-quality debt instruments, such as corporate bonds, government securities, and Treasury bills. The debt mutual funds can provide investors with a higher rate of return than any other savings account.
- Post-Office Term Deposit: It is one of the most secure schemes for short-term investments in India. The duration ranges from one year to two years, three years, and five years. Under this model, the government plans quarterly returns and guarantees the investment’s return.
- Recurring deposits: It is one of the finest investment plans for investors seeking a safe asset class and who wish to invest a small fixed amount with a bank on a regular basis. The investor receives the principal plus interest at the end of the policy term. The recurrent deposit promotes healthy saving habits and is a profitable investment option.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
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