While many investors get excited about owning shares in small, fast-growing companies, others prefer the stocks of established household names that provide a sense of stability and security. However, even the most successful investors tend to overlook a significant portion of the stock market: mid-cap stocks.
Like Goldilocks' chair, medium-cap stocks are the not-too-big, not-too-small companies that are "just right" for investors who want a combination of growth and profitability. If your portfolio already holds a lot of small-cap or large-cap companies (or both), adding some mid-cap stocks can help you diversify your portfolio.
Here's a closer look at mid-cap stocks, including how to choose the best ones and how to decide if mid-cap stocks are right for you.
What are mid-cap stocks?
Mid-cap stocks are stocks of companies with medium-sized market capitalizations or valuations. They're so named because they fall between small-cap and large-cap stocks.
A stock is classified as mid cap when the total value of all of the company's shares outstanding falls between $2 billion and $10 billion. Here's how stocks are generally classified by market capitalization:
Category | Market Capitalization |
|---|---|
Micro-cap companies | Less than $300 million |
Small-cap companies | $300 million to $2 billion |
Mid-cap companies | $2 billion to $10 billion |
Large-cap companies | $10 billion to $200 billion |
Mega-cap companies | More than $200 billion |
Mid-cap companies include fast-growing, young companies that have outgrown their small-cap origins, as well as mature companies operating in stable and profitable corners of the market. The COVID-19 pandemic made technology more important than ever and helped make some previously small businesses into much larger ones.
While small-cap stocks are often fast-growing but volatile, and large-cap stocks tend to be relatively slow-growing but stable, the best mid-cap stocks are often somewhere in between. Mid-cap companies are both less volatile than fast-growing small caps and have more growth potential than mammoth large-cap companies.
Investment strategies for mid-cap stocks
Whether you're a growth investor, a value investor, or something in between, mid-cap stocks offer the potential to increase wealth in a balanced portfolio without excessive risk.
For investors seeking the best growth stocks, identifying emerging leaders in a field is key, especially if you're considering a fast-growing segment like technology, healthcare, or consumer services. Look for companies that are rapidly increasing earnings, especially during an economic boom.
Investors focused on value stocks should start with companies that are trading for less than their intrinsic value or that face temporary challenges. If you're looking at income stocks, a strong dividend yield with room to grow is also a good sign.
Investors who favor a combination of growth and value stocks might want to consider an exchange-traded fund (ETF) to balance potential risks and rewards.
Three great mid-cap stocks and funds to buy
Don't be surprised if you don't immediately know the name of every mid-cap stock that we highlight below. Some mid-cap companies are household names, but many aren't, especially those that operate in specialized industries.
Here are three interesting mid-cap stocks:
| Name and ticker | Market cap | Dividend yield | Industry |
|---|---|---|---|
| Ambarella (NASDAQ:AMBA) | $2.2 billion | 0.00% | Semiconductors and Semiconductor Equipment |
| CRISPR Therapeutics (NASDAQ:CRSP) | $4.4 billion | 0.00% | Biotechnology |
| Iridium Communications (NASDAQ:IRDM) | $2.9 billion | 2.11% | Diversified Telecommunication Services |
1. Ambarella
NASDAQ: AMBA
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2. CRISPR Therapeutics
NASDAQ: CRSP
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3. Iridium Communications
NASDAQ: IRDM
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Mid-cap ETFs
Not sure which individual mid-cap stock or stocks to pick? A mid-cap-focused exchange-traded fund can help diversify your portfolio by providing exposure to a wide range of mid-cap stocks. Two of our picks for mid-cap-focused ETFs are:
1. Vanguard Mid-Cap ETF
NYSEMKT: VO
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NYSEMKT: IJK
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How to evaluate top mid-cap stocks
Since mid-cap stocks are often former small-cap stocks, the process of finding the best ones is similar to searching for great small-cap companies. You should see a history of sales and profit growth. If a company is lacking either, make sure you understand why.
For mid-cap companies with growth potential, sales should be consistently increasing over time. If sales aren't growing, take that as a warning sign. It's essential to discover a good reason for this before you invest.
A stock's price also will tend to correlate with the company's profits. If a company's earnings are growing, then its stock price typically rises. If losses are increasing even while sales are rising, then it's important to understand the reasons.
Benefits and risks of mid-cap stocks
If mid-cap stocks don't have many or all of the potential benefits of a small- (or large-) cap stock, investors can take comfort in knowing they also don't have many or all of the potential risks. Among the unique benefits:
- Growth potential. Mid caps still have plenty of room for enormous growth.
- Performance. Mid caps generally outperform smaller and larger stocks over long periods.
- Takeover targets. Mid caps are still potential mergers and acquisitions (M&A) targets, which can cause stock prices to leap.
Keep in mind, however, that mid caps also carry some unique risks:
- Price fluctuations. More stable than small caps, mid caps still can be subject to occasional price volatility.
- Analyst coverage. Mid caps seldom receive the kind of analyst attention paid to large caps, so investors often have to do their own research.
- Financial resources. Again, mid caps have more resources than most start-ups or small caps, but that doesn't mean they're bulletproof during economic downturns.
How to invest in mid-cap stocks
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Mid-cap vs. large-cap stocks
The most obvious difference between mid-cap and large-cap stocks is, of course, market cap. But there are other, more subtle differences that investors need to consider:
- Mid caps are generally more volatile than large caps (although less so than small caps).
- Large caps generally grow steadily. There's more room for appreciation with mid caps.
- Mid caps frequently do better during the early stages of economic recoveries, when investors feel more confident about taking on risk (but not so confident that they're willing to risk it all on small caps).
- It's easier to find buyers and sellers for large caps than mid caps, which can suffer from wider bid-ask spreads when the market is volatile.
- Analysts pay greater attention to large caps than mid caps.
Related investing topics
FAQ
FAQ: Investing in Mid-Cap Stocks
About the Author
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool has positions in and recommends Meta Platforms and Vanguard Index Funds - Vanguard Mid-Cap ETF. The Motley Fool has a disclosure policy.
