Are you aware of the term ‘dark horse’?
For those who are unaware,
“A dark horse is a contender about whom people know very little regarding their skills and ability, but they possess the potential to turn out successful.”
Well!
Mid Cap Stocks are analogous to the term dark horse in the financial world.
But, how do you identify the dark horse?
To gain that skill, one needs to understand the fundamentals of Mid Cap stocks.
So, without any further ado, let us dive right in.
These companies are neither too big nor too small and are “just perfect” for investors looking for a mix of growth and profitability.
Mid-cap firms are interesting since they are expected to grow and boost profits while increasing market share. Investors consider stocks of such firms to be less dangerous than small-cap stocks but riskier than large-cap stocks as they are still in the growth stage.
They are in the midst of their growth curve regarding parameters like efficiency and productivity. If you want to identify a Mid Cap Stock, you need to calculate a company’s market capitalisation and determine whether it is a mid-cap company.
One way to find out market capitalisation is by multiplying a company’s outstanding number of shares with the value of each share.
But, to gain clarity about the concept, one needs to first understand the definition of the Mid Cap Stock.
The term “mid-cap”refers to companies and stocks that fall between the large-cap and small-cap categories.
This classification of a company’s stocks is determined by its market capitalisation.
These stocks belong to companies with an average market capitalisation of somewhere between Rs. 5,000 Crore to Rs. 20,000 Crore. Such companies are expected to grow into large-cap companies with the right strategy and efficient operations.
Companies listed from 101st to 250th in the NIFTY index are generally considered to be mid-caps. NIFTY also has a benchmark mid-cap index in India called Midcap 50, which hosts the top 50 mid-cap most traded securities in India.
Mid-cap stocks are versatile, given their ability to possess some large-cap and small-cap stock attributes. The characteristics of mid-cap stocks are as follows:
Mid-cap stocks are diversified because they comprise many companies that fall between large-cap and small-cap categories. The returns and risks associated with these shares vary on the company’s future performance.
There is a wide range of mid-cap stocks in the market, which range from the new mid-caps to the matured mid-caps. This wide range provides diversity in investment. Some mid-cap companies may be nearing the development stage from being small-cap companies.
But, though not fully established as mid-cap companies, these companies still offer higher returns and lower volatility than small-cap stocks.
There is a wide range of mid-cap stocks in the market, which range from the new mid-caps to the matured mid-caps. This wide range provides diversity in investment.
At the same time, others may have recently graduated from a small-cap company to a mid-cap one and thus can provide greater returns than stability.
Mid-cap stocks are relatively liquid in comparison to small-cap stocks. Buying and selling stocks is simple because they are well-known and famous, offering excellent liquidity to investors.
They are not as liquid as blue-chip companies, but they are traded more than small-cap stocks due to their increased capital size, market share, and reputation. As a result, investors are more at ease investing in mid-cap companies.
Mid-cap stocks belong to companies with substantial growth potential that could be perfect investors who are willing to take the moderate risk for significant returns.
This growth happens because mid-cap stocks have not yet realised their full growth potential like large-cap stocks.
Mid-cap companies might gain tremendously during a bull market or favourable market conditions due to their untapped potential, resulting in higher returns.
Mid-cap stocks are the connection between small-cap stocks and large-cap stocks, and the following reasons indicate the advantages of investing in mid-cap stocks.
The benefits of investing in mid-cap stocks are as follows:
Business entities experience several stages in their life cycle. The introduction stage companies have the lowest market capitalisation as they are yet to generate earnings.
After the introduction stage, companies tend to enter the second stage, the growth stage.
The demand for the company’s products increases, and due to this, the company’s market capitalisation grows.
Mid-cap companies are in this stage, and it is less risky than the small-caps yet more adaptive to change than large-caps. The investor may invest in stock during its growth to earn the fruitful return of capital appreciation during maturity when the earnings are stable, which results in higher stock prices.
The mid-cap stocks are underdogs, i.e., the portfolio allocation to mid-cap stocks is lower, but the mid-cap stocks are attractive investments to be made. They are nothing but small-cap stocks with higher success rates and have survived the introduction stage.
They have survived the small-cap introduction stage, giving them a financial advantage over the small-cap stocks. Mid-cap stocks have been outperforming due to their ability to deliver cash flow and growth.
Small-cap stocks are risky stocks but may produce good returns, and large-cap stocks are less risky stocks but may produce lesser returns.
On the other hand, they may provide better returns than large-cap stocks. As a result, the return per risk relationship is better in mid-cap stocks.
As rosy as these stocks may look, there is also a flip side to these investment instruments. Few demerits associated with Mid Cap Stock are as follows:
A value trap is a situation that occurs when a corporation operates in a low-profit environment with little cash flow and cannot break free. When markets are not performing well, this overreliance might lead to volatility issues. The situation is especially true when stocks are overvalued and stock market volatility is at its highest.
Mid-cap companies are highly susceptible to a value trap, especially those with low rankings. The majority of revenue in mid-cap stock may come from a single business line, and it may go out of business if the trend continues.
A scarcity of opportunities can hamper the growth of the market’s Mid Cap Stock segment.
Mid-cap enterprises are more likely to have inefficient managerial and organisational infrastructure when compared to large-cap companies.
Hence, even though the mid cap stock makes a lot of money while increasing its worth, the tight not be able to make the best use of it due to a lack of opportunities.
An unstable financial bubble may cause a mid-cap company’s outstanding performance.
Due to market speculation of more price increases, mid-cap stocks may perform very well.
On the other hand, most of these businesses may lack the financial strength to survive when the bubble bursts. As a result, when an investor is looking for the best mid-cap stock, they must make sure to investigate the financial history of those mid-cap companies.
Also, many mid-cap companies may lack the financial wherewithal to withstand the speculation before the bubble to assess their financial strength appropriately.
To forecast the future growth, investors must thoroughly examine the company’s past financial soundness.
Mid-cap stocks have features like; diversity, chances of growth, moderate rate of risk, and liquidity. These features make mid-cap stocks more advantageous over small-cap and large-cap stocks.
History has witnessed that most Mid-cap stocks perform better than both small-cap stocks and large-cap stocks in terms of return and capital appreciation.
They are expected to perform better in the current market, given that mid-cap stocks have features of both small-cap stocks and large-cap stocks.
This aspect allows them to exploit the best of both the market extremes, i.e., moderation of risk and substantial return.
The few main advantages an investor may enjoy by including the mid-cap stocks in their portfolio are as follows:
Mid-cap stockholders get easy credit on mid cap stock compared to small-cap stockholders.
The investor is exposed to more risk when investing in small-cap stocks than in mid-cap stocks, which gives mid-cap stocks the upper hand in attracting investors.
Mid-cap stocks are in the middle of the market growth graph, i.e., between small-cap and large-cap stocks that give it room for appreciation in value, and investors have better chances of receiving capital appreciation.
Mid-cap stocks are like the underdog stocks, meaning that they may get overlooked by investors in the initial days resulting in limited attention.
Limited attention leads to low demand, which leads to low pricing, making them more attractive for inclusion in an investor’s portfolio.
Investors may invest a more considerable amount in such stocks to earn price appreciation if they are confident that the stock will catch attention in the future.
Compared to the small-cap stocks, mid-cap stocks provide more information on the financial position and health, making it easier to analyse the companies listed in the mid-cap arena.
An efficient investor can quickly analyse the available data and make more rational investing decisions while investing the hard-earned money.
If an investor considers investing in mid-cap funds, they should go for it if their investment objectives match the perks provided by mid-cap stocks.
The following are some investment objectives while investing in the Mid Cap Stock:
Mid cap stocks are in the middle of the market growth graph, i.e., between small-cap and large-cap stocks that give it room for appreciation in value and investors may have better chances of receiving returns.
Compared to the small-cap stocks, mid-cap stocks have lower risk due to diversity and lower complexity in the business.
Investors generally overlook mid cap stock, resulting in price affordability. They give suitable returns, and thus the price of such stocks tends to grow in the future, which results in price appreciation.
If an investor is seeking a long-term investment that will generate sustainable growth, mid-cap stocks are an excellent choice because the investor can profit from price fluctuations when the mid-cap stock is becoming a large-cap stock.
If investors are looking for the objectives listed above, they can invest in Mid Cap Stock.
Some of the most notable companies that are perfect for investors looking to invest in Mid Cap Stock are as follows:
Crompton Greaves Consumer Electrical (CGCEL) is a front runner in the industry of fans and light consumer electrical markets.
It has an excellent product portfolio that focuses on diversification and innovation. The company is said to have generated a gross Internal Rate of Return of 33%.
The company is expected to grow significantly in the coming years due to its robust distribution network in the consumer electrical space.
However, it does face competition from leading players like Orient electric and Havells, which could hinder the company’s growth.
Escort is one of the front runners in the tractor manufacturing industry. The company has a well-established dealer at work and robust financers with periodic product launches and marketing tactics.
Escort has also established its presence across various sectors apart from tractor manufacturing like agriculture machinery, construction equipment, and railway equipment.
The company’s growth potential seems ambitious due to its performance over the last three years.
However, the market share of Escorts in the Western and Southern regions is still not up to the mark.
Relaxo Footwears is one of the front runners in the non leather footwear market in India.
The promoters of this brand have been involved in the footwear business for the past 30 years.
The firm has shown 13% and 27% growth in profits over the last decade, and the company is expected to grow significantly in the upcoming years.
Polycab India (PIL) is one of the front runners in the Indian cable and wire industry. The company already has 22% of the market share in the cable market.
The country’s southern and western zones are where the form is famous for its products.
The red flag for the firm could be that it is domestically focused.
However, it is expected to grow significantly as they expand its business and operations in the coming years.
Deepak Nitrite (DNL) is a significant contributor to the chemical industry of India, which is one of the fastest-growing contributors to this industry worldwide.
For the past five years, the growth rate of Deepak Nitrite (DNL) has been around 26 percent. The company is expected to grow significantly in the upcoming years.
India is a fast-growing economy that liberalises industrial and service sectors. Hence, the chances of a mid-cap company turning into a large-cap company are better than in developed economies like the US and Europe.
Let us understand how Mid Cap Stock differs from small-cap stocks with the help of an all-encompassing comparison chart.
Serial No. | Basis | Mid Cap Stock | Small-cap stocks |
1. | Definition | Mid cap stocks are shares of those companies that have an average market capitalisation and financial position. These companies are positioned better than small-cap companies but lesser than large-cap companies. | Small-cap stocks are stocks of those companies that have the lowest market capitalisation and financial position in the market. Typically, these are the companies that have newly entered the market and have the highest risk. |
2. | Market capitalisation | Mid-cap companies have a market capitalisation of between Rs 5,000 crores and less than Rs 20,000 crores. | Small-cap companies have a market capitalisation of less than Rs 5,000 crores. |
3. | Risks involved | Risk is more prevalent in mid-cap companies because many investors invest in growing companies, resulting in higher volatility in returns. | Small-cap companies are riskier because their prices fluctuate more frequently, increasing the risk for investors. |
4. | Growth potential | Mid-cap companies have ideally high growth potential. They are an excellent investment option for investors seeking slightly higher growth. | Small-cap companies have the most significant potential for growth compared to mid-and large-cap companies. They have lower share prices, and their smaller size allows them to grow more prominent in the future. |
5. | Liquidity | The stocks of Mid-cap firms’ have the liquidity that is often lower than that of large-cap firms because these firms are still in their development stage while the large-cap firms are already developed.
However, mid-cap firms have greater liquidity than small-cap firms, given their better position and lesser risk. |
Compared to mid-and large-cap enterprises, small-cap companies have the least liquidity. These equities have low trading volumes, which are often relatively lower than large-cap and mid-cap stocks. |
6. | Types of investors | Investors who want to grow their wealth substantially but do not want to bear a risky portfolio – choose Mid Cap Stock. Mid Cap Stock helps create a diversified portfolio. | Small-cap stocks are perfect for investors that have a huge risk appetite.
These investors desire huge capital appreciation. |
7. | Volatility | Mid-cap stocks are more volatile than large-cap stocks but less than small-cap stocks. | Small-cap stocks are the most volatile stocks. |
8. | Returns | Mid Cap Stocks promises better returns at a moderate risk. | Small-cap stocks promises substantial returns at high investment risk. |
If an investor feels unsure about investing in Mid Cap Stock, then there are a plethora of alternative investment options available for them.
The substitute investment options for Mid Cap Stock are as follows:
Sovereign Bonds are issued by the government that provides regular income over some time to the investor.
These bonds are appropriate for risk-averse investors looking for secure investment options.
As the name suggests, debt funds are used to invest in the company as debt, and debt funds provide a regular and fixed income to the investor. Debt funds include debentures, bonds, treasury bills, etc.
They provide steady returns over comparative risk.
Balanced funds refer to funds used to purchase stock and debt instruments and help the investor diversify the portfolio’s risk.
Shares are risky compared to debt instruments, and thus, balanced funds are used to average out the portfolio’s risk.
Overall, we can conclude that mid-cap stock belongs to companies with average market capitalisation.
These companies are on the rise and have the potential to provide substantial revenue like capital appreciation because of their growth.
The telecom giant Airtel and the IT pioneer Infosys were once mid-cap companies, but now they are successfully established large-cap companies in their respective sectors. Hence, a worthy mid-cap company can offer substantial growth to investors.
The only caveat here is the careful selection of the company.
An investor must never forget that the situation can turn either way. Therefore, it is crucial to DYOR (do your own research) and invest while considering the risk involved.
Your investments should be in synchronisation with your risk appetite.
Mid Cap Stocks have lesser risk than the small-caps and higher benefits of movement with the market.
An investor must invest a smaller amount in the mid-cap stock, which gives investors easy access to invest in them. Mid Cap Stocks have been rising in the market due to reasons like:
Potential to Become Large Caps
Mid Cap Stocks are those stocks that outperform in their first stage and have been generating better returns. These stocks have the potential to become large-cap stocks in the future.
Therefore, investors can generate gains from the mid-stocks in the growth phase.
Growing
The mid-caps have better credit in the market than the small-caps, which makes it easy for them to grow and outrun the small-caps to generate better returns in the current market. The mid-caps can also explore expanding their business as a growth strategy.
Stable for Long-term
The mid-cap stocks are highly Volatile, and thus these are suitable for long-term investment purposes. Time averages out the volatility and results in significant returns in the long run.
Market Capitalisation refers to the total value of the company's stock. The current market price of the company's stock is considered while calculating the market capitalisation. The total number of issued equity shares of the company is multiplied by the current market price per equity share:
Market Capitalisation = (Total number of equity shares issued) * (Market price per share).
For example, Company has 1,500 issued equity shares, and the price is Rs. 200,
Then market capitalisation = Rs. (1,500*200) = Rs. 3,00,000
Market capitalisation allows the investors to compare the size of the companies in the market and make rational decisions. It shows how much the investors are willing to pay for the company.
The first and foremost important decision an investor has to make is "where to invest?" and "how much to invest. The following are the main reasons an investor should keep in mind while making their investment decision between small-cap stocks and mid-cap stocks:
Liquidity
Liquidity refers to the ability of a stock to be purchased or get sold in the market. The liquidity of easily traded stocks in the market is higher than stocks that move slowly. Large-caps have the most increased liquidity while the small-caps have the least liquidity. An investor may average out their liquidity by investing in the mid-caps.
Volatility
Volatility plays an important role when making investment decisions. Mid-cap stocks have lesser volatility as compared to small-cap stocks. Small-caps are minor players and often go unnoticed unless they generate exceptional higher returns and impact the market. Thus, small-cap stocks are far more volatile when compared to mid-cap stocks.
Risk appetite
Mid-cap stocks have higher growth chances, the small-cap stocks have highest growth chances, but the risk associated with small-cap stocks is higher than that of mid-cap stocks.
Thus, the investor may manage the risk well within their risk appetite by investing in both stocks in a suitable ratio.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Open Demat Account &
Trade @ Rs15 per order.
“Filing of complaints on SCORES – Easy & quick”
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.