Five factors to consider while exploring mid-cap stocks

People often search for investment grounds where they can experience less volatility and gain from significant upside potential. Hence, investors seeking such balanced exposure can find comfort in mid-cap stocks, which offer a compromise between growth, risk, and volatility relative to large-cap and small-cap stocks.

Let us first talk about what mid-cap stocks are and their characteristics to understand them, which will help you take the right investment call. Further, this article by Kalkine Media® will discuss five factors investors need to watch while exploring mid-cap stocks.

What are mid-cap stocks?

From a technical perspective, mid-cap stocks are the shares of companies with a market capitalization ranging between C$ 2 billion and C$ 10 billion. As mid-cap companies have already been through high-volatile phases involving start-ups and early market stages, they are deemed very stable considering their proven abilities to survive in the complex market environment.

From an investment point of view, mid-cap stocks are associated with low risk due to their larger market capitalization (compared to small-cap stocks), as they have ample resources to explore and capitalize on business opportunities. Another reason investors with a low-risk appetite might consider medium-sized companies is that they have exhibited staying power in the past.

Investing in mid-cap stocks: Here are 5 things to keep in mind

1.    Volatility

Mid-cap stocks are less volatile than their smaller counterparts. The rationale behind this is that mid-cap companies possess the ability to stabilize their business performance due to their larger market size.

On the other hand, mid-cap stocks are considered volatile when compared to large-cap stocks. Hence, investors with moderate risk tolerance can look at mid-cap stocks with sound fundamentals and robust financial results.

2.    Do mid-cap stocks pay dividends?

The decision to pay dividends depends on a particular company. However, some mid-cap companies are steadily distributing dividends to provide value to shareholders. Hence, income-focused investors can explore such mid-cap stocks to build an additional income stream.

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3.    Growth prospects

Mid-cap companies have greater growth exposure than their larger counterparts, based on the understanding that they have more room to grow and emerge as large-cap players in the future, assuming favorable business dynamics and performance.

On the other hand, companies with smaller market capitalization offer higher growth exposure than mid-cap companies. When backed by healthy business operations and a favorable market environment, mid-cap stocks could expand their market size significantly, which might reflect their valuations and stock prices.

4.    Risk factor

Speaking of risk associated with mid-cap investing, these stocks are supported by more established business models and have a grasp on their respective industries. Due to these reasons, mid-cap stocks are less risky than stocks having a market capitalization below C$ 2 billion. Large-cap stocks belong to established companies with proven business performances and hence, involve less risk than mid-cap companies.

5.    How to invest in mid-cap stocks?

Both retail and institutional investors often overlook mid-cap stocks as they either target high-growth (small-cap stocks) or stable returns (large-cap stocks). Investors need to identify quality mid-cap stocks based on their risk-reward preference.

Bottom line:

The broader market this year has seen rallies one day and stocks tanking on the next. Investing in such an environment is fraught with uncertainties, however good a strategy an investor may employ. However, a long-term strategy works best to wade through such market upheavals. Traders need to do their analysis well not to lose money in the bargain.