What Are Mid Cap Stocks? 4 Reasons to Buy

4 Reasons to Buy Mid Cap Stocks

mid cap
Many real estate investment companies are in the mid cap range. Photo: Don Kravitz / Getty Images

Definition: Mid-cap stocks are shares of public companies with market capitalizations between $1 billion and $5 billion. Some analysts even consider companies as large as $10 billion to be mid cap. The market cap is found by multiplying the company's number of shares of stock times the current stock price.

4 Reasons to Buy

Mid-cap companies should be part of any well-diversified portfolio. You can add or subtract to your holdings depending on the business cycle and your particular investment needs.

Here are three reasons to buy mid-cap stocks.

1. Business Cycle Expansion: These companies perform well in the early parts of an economic recovery when interest rates are still low.  Managers can get low-cost loans to fund growth. That can be either through investment in capital equipment or mergers and acquisitions. This type of activity also benefits when capital is relatively cheap. (Source: Ken Little, Look for Gains in Mid Cap Stocks)

2. Mid Cap vs. Small Cap: Just by their size, mid-cap companies are not as risky as small cap businesses. They have usually been around longer, so you can get more information about them through research. They have more of a track record and are a bit more stable.

In fact, research is crucial for mid-cap companies. Some may be at this level indefinitely. Their business model may not warrant them to grow any larger. Their management may not want to become a large cap company.

Others may be poised to be the next big breakout. They may be on the verge of announcing a new product or acquiring a competitor. In these cases, a mid-cap can provide the same growth potential with less risk. In an economic downturn, they will be less likely to go bankrupt as a small cap company.

3. Mid Cap vs. Large Cap: A mid-cap company will not be as stable as a large cap company, for the most part.

They don't have as much the capital or the same track record. Therefore, they will be riskier in the contraction phase of the business cycle. However, in the expansion phase, the mid-cap company could be very profitable.

4. Mid Caps Outperform Large and Small Cap: John Roth, the portfolio manager of Fidelity Mid-Cap Stock Fund, found that mid caps have outperformed small and large caps over the last 20 years. He compared the returns of the Russell MidCap® Index with both the Russell 2000® Index (small-cap), and Russell Top 200® Index, (the 200 largest cap). Mid caps outperformed consistently (Source: Fidelity.com, Take a Look at Mid Caps Now, March 7, 2012)

Examples of Mid-Cap Companies

Many mid-cap companies are very well known. They have been around for awhile, but have a good market niche and haven't needed to grow. Or, they have good earnings, but are in an unattractive segment of the stock market and have a low price to earnings ratio.

Many mid-cap companies are in the finance, real estate or transportation related industries. Here's a list of some companies you might have heard of just to give you an idea of a mid-cap corporations:

  • 3D Systems Corp
  • Dollar Tree Inc.
  • Nu Skin Enterprises
  • Pitney Bowes

This list is not in any way an indication that these are safe investments. That's the role of a good financial planner. Mid-cap stocks may not even be a good fit for your personal investment goals. Second, consult with a financial planner to decide whether you'd rather buy individual mid-cap stocks, or purchase them as part of a mid cap mutual fund. These funds are led by managers who know the mid-cap business inside and out. Or, an exchange-traded fund that focuses on mid-cap stocks might be right for you. (Source: Russell Investments, Mid Cap Stocks, June 26, 2015) Article updated November 14, 2015.