Mid-Cap Stocks

Mid-cap stocks are shares of companies with a total market capitalization range of about $2 billion to $10 billion. Along with large-cap and small-cap stocks, mid-cap stocks are one of the three main stock categories and offer a compromise between their larger and smaller counterparts’ growth, risk, and volatility tradeoffs.

How Does Market Capitalization Work?

Market capitalization, or market cap, is a formula for calculating a company’s value in the stock market. Market cap is the price of a company’s stock multiplied by the number of outstanding shares. For example, a company with 100 shares, each worth $100, would have a market cap of $10,000 (100 shares x $100).

Share value and total outstanding shares are available for all publicly traded companies. Most stock research tools also indicate a company’s market capitalization.

Even though a company’s size doesn’t tell you everything you need to know about its stock, stocks of similar sizes tend to share many characteristics. That’s why it can be helpful to divvy up the stock market into large-, mid-, and small-cap categories. The market cap also comes in handy for a few reasons:

• Index membership. Index providers use market cap data to decide which companies will be included in significant benchmarks. In turn, index funds are directly impacted by these decisions.
• Fund strategies. Portfolio managers often focus on specific attributes, like market cap, when deciding on their investment strategy—and ultimately, which stocks will be included in funds.
• Asset allocation. To balance out risks in a portfolio, you may want to include a mix of stocks (or funds) with large, mid, and small-cap companies.

Mid-Cap Stocks

Mid-cap companies haven’t entirely made it to the large-cap status but have a more established business track record than small-cap companies. Similarly, their stocks offer a middle ground to the risks and rewards of their smaller and larger counterparts.

Mid-cap companies typically have a market value that ranges from approximately $2 billion to $10 billion. These companies usually have an established business model and foothold in their respective industries and may experience rapid growth as they expand their market share. They often are the target of mergers or acquisitions by large-cap companies. However, the mid-cap category also includes former large-cap companies that have fallen in size and dominance.

In terms of their investing attributes, mid-cap stocks typically are less risky, experience less volatility, and may have less growth potential than small-caps—but they are riskier, experience more volatility and have higher potential gains than large-cap stocks.

There are two primary benchmarks for mid-cap stocks:

• S&P MidCap 400 Index. The S&P MidCap 400 Index tracks the performance of 400 mid-sized U.S. companies with valuations between about $2 billion and $8 billion. As of August 2022, the median market cap of companies in this benchmark was nearly $5.7 billion.
• Russell Midcap Index. The Russell Midcap Index tracks nearly twice the number of companies as the S&P MidCap index—more than 800—and is a subset of the more prominent Russell 1000. The companies in this index had a median market cap of $10 billion as of August 2022.

Mid-Cap vs. Large-Cap Stocks

Mid-cap companies could be the large-caps of the future—or past. Large-cap stocks have the broadest range of valuations, from $10 billion up (currently topping out at $1+ trillion), so it’s helpful to consider whether a mid-cap is rapidly growing or declining. In addition, there are differences in the business and investment characteristics between mid- and large-caps:

1. Stage in the business lifecycle. Large-caps are the most well-established companies in their respective industries. Compared with mid-caps, their businesses are more diversified and could include a broad range of products and services in multiple industries.
2. Geography. Large-cap companies typically are multinational, operating in countries around the world. Among the 500 U.S. large-cap companies, only 62% of sales are domestic, compared with 75% for the 400 mid-cap companies, according to 2019 figures compiled by S&P Dow Jones Indices. As a result, mid-cap companies are less exposed to currency fluctuations or a slowdown in the global economy than large-caps. Conversely, they may experience more volatility if domestic economic conditions falter.
3. Growth. Because mid-cap companies may still expand, their stocks could experience more significant gains than large-caps. In fact, since 1994, the S&P MidCap 400 Index has outperformed the S&P 500 (and also the S&P SmallCap 600), according to data from S&P Dow Jones Indices.
4. Risk. Large-cap companies have more established business models, which typically means their stocks are less risky than mid-caps. Mid-cap companies that are expanding market share could see dramatic jumps in quarterly performance, while the opposite may be true of struggling companies.
5. Volatility. Both on an individual stock basis and as a group, mid-caps are more likely to experience wild moves up or down in their stock prices relative to large-caps.

The primary benchmark for U.S. large-caps is:

• S&P 500 Index. The S&P 500 Index is among the major stock market indexes most famous. It tracks the performance of the 500 largest U.S. publicly traded companies. As of August 2022, these companies had a market cap of $30 billion.

Mid-Cap vs. Small-Cap Stocks

As the name implies, small-cap stocks have smaller market capitalizations than mid-caps, ranging from approximately $300 million to $2 billion. Both groups have the potential for significant gains as companies gain market share and risk uncertainties with their business models.

1. Stage in the business lifecycle. Small-cap companies aren’t necessarily younger than their mid- and large-cap counterparts, but their businesses aren’t as well established. Small-cap companies typically have a narrower focus, offering a smaller number of products or services in fewer locations than mid-caps. Small-caps often become mid-caps as their businesses expand.
2. Geography. It’s common for U.S.-based small- and mid-cap companies to operate primarily in the U.S. However, as companies get larger, they also tend to expand their footprint internationally. Among the companies in the S&P MidCap 400, 75% of sales were generated domestically, compared with 79% for the S&P SmallCap 600. This distribution may protect both from international economic slowdowns but leaves them more vulnerable to domestic slowdowns than large-cap stocks.
3. Growth. The prospect of faster growth attracts many investors to small- and mid-cap stocks. Because of their relatively smaller size, small-cap companies may experience even bigger gains in their businesses. Mid-cap companies are more likely to be involved in mergers or acquisitions.
4. Risk. Thanks to their established business models and footholds in their respective industries, mid-cap companies are generally considered less risky investments than small-caps.
5. Volatility. Small-cap companies tend to face more uncertainty with their business models, which can result in surprises in their quarterly earnings and more significant moves up or down in their stock prices relative to mid-caps.

The most commonly-cited benchmarks for small-cap stocks are:

• Russell 2000 Index. The Russell 2000 Index tracks the performance of approximately 2,000 of the smallest U.S. companies, with a median market cap of $2.2 billion as of August 2022.
• S&P SmallCap 600 Index. The S&P SmallCap 600 Index tracks a smaller universe of just 600 small-cap companies. As of August 2022, the companies in this index had a median market cap of approximately $1.4 billion.