What Is a Mid Cap Company?
A mid cap company is a publicly traded firm with a market capitalization falling within a specific range, typically between $2 billion and $10 billion. This classification, central to equity investment and portfolio theory, positions these companies between smaller, high-growth small-cap company and established, stable large-cap company enterprises. Mid cap companies often represent businesses that have moved beyond their initial growth phase but still possess significant potential for expansion, offering a balance of growth prospects and relative stability compared to their smaller counterparts.
History and Origin
The concept of classifying companies by their market capitalization emerged as financial markets matured and investors sought to segment the vast universe of publicly traded entities. While precise historical origins for the "mid cap" designation are not tied to a single event, the practical application of these categories gained prominence with the development of major stock market indices. For instance, S&P Dow Jones Indices, a prominent provider of market benchmarks, maintains distinct indices for large, mid, and small-capitalization companies, such as the S&P MidCap 400 Index. These indices formalize the market capitalization ranges used by investors and analysts to categorize companies and track their performance.5 Similarly, the FTSE Russell Group, another major index provider, launched the Russell Midcap Index on November 1, 1991, to specifically measure the performance of the mid-capitalization segment of the U.S. equity universe.4
Key Takeaways
- A mid cap company generally has a market capitalization between $2 billion and $10 billion, although precise definitions can vary by index provider.
- These companies often represent a balance between the high growth potential of small-cap firms and the stability of large-cap firms.
- Investing in mid cap companies can offer diversification benefits within an investment portfolio.
- Mid cap stocks are included in specialized indices, such as the S&P MidCap 400 and the Russell Midcap Index, which serve as benchmarks for this segment.
- They may exhibit greater volatility than large-cap companies but less than small-cap companies.
Formula and Calculation
The classification of a mid cap company relies on its market capitalization. Market capitalization is calculated by multiplying a company's current share price by the total number of its outstanding shares.
The formula is expressed as:
Where:
- Current Share Price refers to the current trading price of one share of the company's equity on the stock market.
- Total Outstanding Shares represents the total number of shares of the company's stock that are currently held by investors, including restricted shares owned by insiders.
Once this value is determined, it is compared against the market capitalization ranges set by various financial index providers or investment firms to determine if the company qualifies as a mid cap company.
Interpreting the Mid Cap Company
The designation of a mid cap company is primarily an investment classification that guides portfolio construction and analysis. These companies are often seen as occupying a "sweet spot" in the equity market, balancing the rapid growth stock potential often associated with smaller firms and the relative financial strength and proven business models of larger corporations. Investors interpreting a mid cap classification consider the company's lifecycle stage: it has typically overcome the initial challenges faced by startups but has not yet reached full market saturation or mature growth rates. This position can lead to a potentially higher return profile than large-cap stocks, though often accompanied by moderate investment risk compared to small caps.
Hypothetical Example
Consider "EcoSolutions Inc.," a company that develops sustainable packaging materials. Five years ago, EcoSolutions Inc. went public and, with a market capitalization of $800 million, was classified as a small-cap company. Over time, the demand for its environmentally friendly products surged, leading to increased revenue and profitability.
Today, EcoSolutions Inc. has 200 million shares outstanding, and its current share price is $30.
To calculate its current market capitalization:
With a market capitalization of $6 billion, EcoSolutions Inc. is now considered a mid cap company, having grown beyond the small-cap threshold but not yet reaching the large-cap designation. This hypothetical example illustrates how successful small companies can transition into the mid-cap space as their business matures and expands.
Practical Applications
Mid cap companies play a crucial role in various investment strategies and analyses. They are frequently included in diversified investment portfolio by investors seeking a balance between growth and stability. Many index fund and Exchange-Traded Fund (ETF) products are specifically designed to track mid-cap indices, allowing investors to gain exposure to this segment without needing to select individual stocks. The Russell Midcap Index, for example, is a widely followed benchmark for mid-sized U.S. companies.3 Additionally, financial analysts often use mid-cap performance as an indicator of the health of the broader economy, as these companies are often more sensitive to domestic economic conditions than multinational large-cap firms. Research has explored the characteristics and performance of mid-cap stocks, with some studies suggesting a "mid-cap anomaly" where these companies may generate higher risk-adjusted returns than both large and small-cap firms over certain periods.2
Limitations and Criticisms
While mid cap companies offer unique investment opportunities, they are not without limitations. Their size, while larger than small caps, still exposes them to higher volatility and investment risk compared to well-established large-cap entities. Mid cap companies may have less access to capital markets than larger firms, making them more susceptible to economic downturns or industry-specific challenges. Additionally, their liquidity in the market can be lower than that of large-cap stocks, potentially leading to wider bid-ask spreads and more significant price movements for large trades. Some academic research suggests that, despite their potential, actively managed mid-cap funds may not consistently outperform market benchmarks after accounting for fees and expenses, indicating that stock selection in this segment remains challenging.1 Investors considering mid cap exposure should carefully assess a company's financial health, competitive landscape, and the overall market environment.
Mid Cap Company vs. Small Cap Company
The primary distinction between a mid cap company and a small-cap company lies in their market capitalization. A mid cap company typically has a market capitalization ranging from $2 billion to $10 billion, reflecting a more established business with proven operations and revenue streams. In contrast, a small-cap company usually falls within a market capitalization range of $300 million to $2 billion, representing younger, often high-growth businesses with less market penetration or operational history.
This difference in size often translates to varying risk and return profiles. Small-cap companies tend to exhibit higher growth potential and greater volatility due to their nascent stage and limited resources. Mid cap companies, while still offering growth, generally possess more stability and financial resilience than their smaller counterparts, having moved beyond the initial high-risk phases of development. Investors often view mid-caps as a bridge between the aggressive growth potential of small caps and the relative safety and consistent dividends of large-cap investments.
FAQs
What is the typical market capitalization range for a mid cap company?
The typical market capitalization range for a mid cap company is generally considered to be between $2 billion and $10 billion, though these thresholds can vary slightly among different index providers and financial institutions.
Why do investors consider investing in mid cap companies?
Investors consider mid cap companies for their balanced investment profile. They often combine the growth potential associated with small-cap companies with a greater degree of stability and financial maturity than their smaller counterparts, making them an attractive component for diversification within an investment portfolio.
Are mid cap companies more volatile than large cap companies?
Yes, mid cap companies tend to be more volatile than large-cap companies. While they are generally less volatile than small-cap companies, their smaller size relative to large corporations can expose them to greater price swings in response to market news, economic shifts, or company-specific developments.
Which stock market indices track mid cap companies?
Several major stock market indices track mid cap companies, including the S&P MidCap 400 Index and the Russell Midcap Index. These indices serve as benchmarks for the performance of the mid-capitalization segment of the stock market.