Mid-cap stocks and their advantages

Mid-cap stocks and their advantages

There is no classical definition of mid-cap shares. The name ‘mid-cap’ originates from the term medium capitalised. It is based on the market capitalisation of the stock.

Market capitalisation is calculated by multiplying the current stock price with the number of shares outstanding or issued by the company. The definition of mid-cap shares can vary from market to market and from country to country.

In case of India, the National Stock Exchange (NSE) defines the mid-cap universe as stocks whose average six months’ market capitalisation is between Rs 75 crore and Rs 750 crore. In the US, mid-cap shares are those stocks that have a market capitalisation ranging from Rs 9,000 crore to Rs 45,000 crore. In India, these shares would be classified as large-cap shares.

Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in the country. The total market capitalisation of US markets is $15 trillion. In India, the market capitalisation of listed companies is around $600bn.

Pros and cons of investing in mid-cap shares?

The theory is that large-cap shares have lesser growth potential since the turnover and profits of large companies are already high in the context of that particular market.

On the other hand, mid-cap shares are considered an attractive investment avenue because their growth rate should be faster. It is analogous to investing in an emerging market like India compared to a mature market.

However on the flip side, mid-cap shares are of small companies where revenue and profits could be more volatile than large companies.

At the same time, the availability of mid-cap shares for trading in the secondary market is also limited in comparison to large-cap shares. The free-float factor, as it is called, is a key to active trading in shares, since investors want an easy entry and exit.

Typically, the promoter holding in these companies is high and there is very little public shareholding. Thus a volatile financial performance and an inadequate free-float make investing in mid -cap shares more risky than in big company shares.

Moreover, the faster growth argument is obviously a generalisation, which may or may not hold for individual companies.

Performance of mid-cap shares?

The National Stock Exchange manages an index called CNX Midcap 200. The objective of such an index is to capture the movement in the mid-cap shares segment.

According to the NSE, CNX Midcap 200 represents about 77% of the total market capitalisation of the mid-cap universe and 75% of the total traded value. This index provides investors a broad-based benchmark for comparing portfolio returns in the mid-cap segment.

Good, informative post.

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very nice.correctly outlined what freshers want to know