Mid-Cap Stocks: Investing Essentials

When thinking about mid-cap stocks, it helps to recall the story of Goldilocks and the three bears. Many investors find that small caps are too "hot" while large caps are too "cold." This draws them to the middle ground, which -- no surprise -- is occupied by mid-cap stocks.

What are mid-cap stocks?

The term "mid-cap" refers to stocks with a medium-sized market capitalization. What does this mean? As Investopedia explains, market capitalization is "just a fancy name for a straightforward concept: it is the market value of a company's outstanding shares." To calculate it, you multiply a company's stock price by the number of shares outstanding.

Take supermarket chain Safeway as an example. At the time of writing, it trades for $34.46 and has 228.8 million shares of common stock outstanding. This yields a market cap of $7.9 billion.

The standard range for what constitutes mid-cap is between $2 billion and $10 billion. This captures well-known companies such as luxury accessories designer Coach and homebuilder D.R. Horton, as well as lesser-known concerns such as New York Community Bancorp and Tesoro, a petroleum refiner headquartered in Texas.

However, this definition is open to interpretation. This is principally because the threshold for large-cap stocks, which serves as the upper boundary for mid caps, is far from settled. While most sources define large caps as stocks with market caps above $10 billion, the leading large-cap index, the S&P 500, sets it at $5.3 billion. 

How many mid-cap stocks are there?

Any estimate of the number of mid-cap stocks depends on how you define the term. If the range is from $2 billion to $10 billion, then 887 make the cut as of August 2014. If $5 billion is used as the upper boundary, then the universe decreases to 599.

Notably, the number of mid-caps is a moving target. As stock prices rise and fall, companies on the margins can either gain or lose the designation. Office supply chain Staples offers a good example. Its market cap over the last decade has fluctuated between $20 billion on the high end and $7 billion on the low end.

What drives mid-cap stocks?

Like most stocks, mid-caps are driven first and foremost by the underlying economy. When the unemployment rate is low, more people have more money. This filters back into the coffers of businesses via higher consumer spending, which makes up almost three-fourths of U.S. gross domestic product.

Additionally, both consumer and investor sentiment play a central role in the performance of mid-caps. Like low unemployment, high consumer confidence acts as a catalyst on spending and thus economic activity. Along with this comes the confidence of investors, which can single-handedly boost the value of stocks by staggering degrees.

Finally, given that many companies underlying mid-caps stocks still have considerable opportunity for growth, multiple sector-specific factors play into the equation. How big is the market for the specific company's product? How much of the market does the company control? Is it realistic to assume its market share will grow? All of these issues are central to the question of what drives mid-cap stocks.

What's the advantage of mid-cap stocks?

The biggest advantage of mid-cap stocks is that they split the difference between large caps and small caps. They're like Goldilocks' porridge in this regard.

Because large caps have less opportunity for explosive growth, they tend to distribute a considerable portion of earnings to shareholders instead of reinvesting the funds to fuel growth. This makes large caps more appealing to income investors but less appealing to growth investors.

Small caps do just the opposite. Rather than distributing earnings to shareholders, they typically reinvest that money in their business in order to fuel growth. This slice of the stock universe attracts investors who are interested in capital appreciation.

Given that mid caps are sandwiched between these two extremes, it stands to reason that they offer a little bit of both. You can see this in the percentage of mid caps that pay dividends compared to their small-cap and large-cap counterparts. 

The takeaway on mid-cap stocks

For investors who want to have their cake and to eat it, too, there's a lot about mid-cap stocks to like. Namely, as a group they offer the opportunity for rapid growth without wholly overlooking many investors' desire for dividends.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3058044, ~/Articles/ArticleHandler.aspx, 8/29/2015 5:16:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated 20 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes