What Are Midcap Stocks?

5paisa Research Team Date: 31 May, 2023 04:43 PM IST

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What Are Midcap Stocks And Why Should You Invest In Them

Mid-cap is a classification for companies and equities that lie between the large-cap and small-cap categories. Mid-cap firms are those with a market capitalization of between Rs. 5000 and Rs. 20,000 crore. Midcap stocks are one such crucial concept- that will help you understand what types of stocks is the right investment for you. 

What is Market Capitalisation?

Essentially, market capitalisation is the total amount of outstanding shares of a firm in the marketplace multiplied by the present value of each share. It gives us the approximate monetary value of the firm. In the stock market, based on their market capitalisation, companies are categorised into three primary sections. They are-

  • Largecap
  • Midcap
  • Smallcap
     

What are Midcap stocks?

This category comprises companies with moderate midcap value. To be precise, businesses with 5,000 crores above and 20,000 below market cap fall under this category. They fall in between largecap and smallcap companies. One of the attractive benefits of investing in such organisations is that oftentimes their profits are expected to increase. Along with profits, market share, value, and productivity are also expected to show an upward trend. 
Since these companies have just entered the growth stage, their position in the market is considered to be volatile. Thus, midcap stocks are considered a risker investment than largecap stocks but are considered less risky investments than smallcap stocks. 
Some examples of midcap companies based in India for making investments are-

  • Castrol India
  • LIC  Housing Finance 
  • Metropolis Healthcare
     

Why Choose Midcap stocks

According to Financial advisors, one should diversify its portfolio to minimise the risk of facing losses. Therefore, a buyer should have an ideal mix of largecap, midcap, and smallcap stocks. Since midcap firms are less risker than smallcap firms, they tend to do comparatively well in terms of finance during difficult times. They have increased returns than largecap organisations and thus have become very appealing to stock buyers for making investments.

How To Choose Profitable Midcap Stocks

Now that you are aware of what a midcap stock is, the question that remains is- how to choose a top-notch midcap stock for investing? Read below to know the answer- 

1. Profit 

Profit and loss are the part and puzzles of a growing company. It heavily impacts the stock prices in the market and the current or future trends. The profit earned by businesses is directly proportional to the stock market price. Thus it means that increase in the firm’s earnings will lead to an automatic increase in the stock price per share. As mentioned earlier, losses are a vital part of a growing company. If the business isn’t earning a substantial amount, but losses are continuously decreasing- it is considered a good sign for investors. However, in cases where losses heighten even with a consistent rise in sales, one should not panic-buy or sell. For instance, a firm remodelling one of their cafes then diminishes in profits is considered normal for a short duration. 

2. Growth

Midcap firms have an abundance of opportunities to grow and turn into largecap companies with time. An organisation reaches the growth stage when it can prove that its profits are high enough to sustain itself. Stock buyers can confirm this profitability by keeping track of the company’s sales. It is considered a good sign when the company’s sales are rapidly growing than largecap firms. If the company sales are stagnant then it becomes a red flag for investment. Furthermore, aligning yourself with the company values, discovering a solid reason for investment, etc.- will also help you in analysing and deciding if the investment is worth the risk. 

3. Research

Research is an integral step before making any investment or stock market-related decisions. Beginners and experts need to consistently update their knowledge about the new trends in the stock market, upcoming or existing businesses, profit and losses of the companies, policies, etc. Based on the meticulous research performed by the individual, a wise investment. Generally, midcap stocks are bought only when the owner can hold them on for more than five years to reap their total benefits. Moreover, the buyer should adjust or be comfortable with the daily changes in the stock prices. 
 

What are the Risks Associated with Mid-Cap Stocks?

By now, you must have a clear understanding of ‘what are mid-cap stocks.’ Most often, a firm’s transition out of the small-cap tier testifies to its growing productivity and financial performance, which increases both the dividends paid out and the company’s value over time.

However, not all companies included in the Indian mid-cap index may be subject to this requirement. So, the risks posed by these stocks are:

Volatility

The majority of mid-cap corporations rely heavily on just one industry. The companies are frequently reliant on a small group of clients. Mid-cap stocks are more vulnerable to price shocks when there is a significant level of market volatility. This implies that investment returns will face adverse impacts right away.

Limited Selection

The market generally lacks opportunities for investment in the mid-cap stock segment. Investors may find it challenging to choose the best stock from the limited selection. In contrast, the large-cap and tiny-cap segments provide a wider range of alternatives.

Speculative nature

A mid-cap stock can perform remarkably as a result of market speculation about continued price hikes. Many mid-cap companies might not have the financial stability needed to support the speculation. 
For this reason, to protect the company’s future growth, investors must thoroughly review its historical financial strength.
 

What are Some Alternative Options to Mid-Cap Stocks?

Mid-cap investments in mutual funds are an alternative for investors who lack the market knowledge or skills necessary to choose the appropriate mid-cap equities. 

Here are several investment opportunities with lesser risks than mid-cap equities and a certain path to returns:

●    Sovereign Bonds: These bonds—which the government issues—provide a consistent income over a certain time period with little risk.
●    Balanced Funds: These funds, known as balanced funds, are used to buy both stocks and debt securities. They do this by diversifying your investment portfolio and balancing high returns with acceptable risk.
    Debt Funds: These funds serve as a way to buy fixed-income instruments, including treasury bills, bonds, and debentures. They offer consistent income at a relatively lower risk.

You can speak with a market expert about your investment to choose the finest investment option to capitalize on your wealth.
 

Conclusion

A simple way to find out midcap stocks or companies is by checking benchmark indices like Nifty and Sensex. The firms mentioned from 101st to 250th are midcap firms. Analyse the financial history and health of midcap stocks of various firms to make a rational investment.

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Frequently Asked Questions

Whether or not investing in mid-cap or small-cap funds is the right choice depends on your risk tolerance. The growth potential of small-cap stocks is comparatively higher than that of mid-cap stocks. 

However, mid-cap stocks carry fewer risks than small-cap stocks. When investing, be attentive to detail and conduct thorough research to make the best decision. 
 

Yes, mid-cap stocks are good for investment, especially when compared to small-cap stocks. Although small-cap stocks can yield higher returns and growth, they can be extremely volatile in nature. 

So, investing in mid-cap stocks becomes a more stable and affordable option. This is the right investment option if your investment plan is for long-term returns and growth. 
 

Anyone who knows mid-cap stocks meaning may wonder how much to invest in mid-cap stocks. Based on your goal period, age, and risk tolerance, you can consider investing around 20 – 25% of your funds in mid-cap stocks. 

It is ideal to invest only between 5-10% of your funds in small-cap stocks. Investing in both in this proportion is a good investment strategy. 
 

In the NSE, there are 150 companies classified as mid-cap stocks. Depending on full market capitalization via NIFTY 500, you can find these stocks listed between 101 - 250 rank. Nevertheless, these mid-cap stocks change over time, as some downsize and become small-cap, while others grow and emerge as large-cap. 

There is no fixed percentage of mid-cap in the stock market. The accurate percentage input varies depending on the fluctuations in the market capitalization values. Nevertheless, mid-cap stocks cover around 16% (approximately) of the stock market.