What is a Mid Cap Stock?

Individual stocks are often identified by the size, or market capitalization of the overall corporation. Middle capitalization, or mid cap stocks are identified with capitalizations that fall into the range between small and large cap equities. This article will define market capitalization, prior to addressing the risk and reward characteristics of mid cap stocks.

Market Capitalization

Corporations finance themselves by selling authorized shares to investors in exchange for ownership stakes. States authorize a set number of shares that may be issued by the corporation. However, shares outstanding actually reference the total number of shares that are held by the public.

The market capitalization of the corporation is calculated by multiplying the shares outstanding by the current share price that the common stock trades for at the moment. Market capitalization is called market "cap" in shorthand.

Publicly traded companies are typically categorized as small, mid and large cap stocks, according to market capitalization size.

Characteristics of Mid Cap Stocks

Mid cap stocks fall between small and large capitalization stocks in terms of size and scale. Investors must realize that the actual parameters of a mid cap stock are open to interpretation and will shift over time. Today, mid cap equities carry market capitalizations that are listed approximately between $2 and $10 billion.

Mid cap stocks usually represent businesses that operate regionally. Middle capitalization stocks that carry a global presence may dominate a particular niche, such as video game software, biotechnology research or medical device equipment.

Risks and Rewards of Mid Cap Stocks

Middle capitalization stocks blend characteristics of both small and large cap issues. In terms of risk, mid cap stocks exhibit less volatility than small cap stocks, but more variance than shares of large capitalization equities. Smaller corporations face larger risks in terms of attracting outside competition and limited access to financing, which may lead to bankruptcy.

Mid cap stocks rarely exhibit the relatively stable cash flow patterns of large, multinational conglomerates; and the corresponding credit ratings may not allow for cheap financing. The middle capitalization stock usually operates as a fringe player within markets that are dominated by a few firms, or within niche industries where conditions will change rapidly.

Investors seeking regular dividend income should avoid mid cap stocks. Mid cap investors must be prepared to accept more volatility than usual in relation to the mega cap stocks, such as ExxonMobil, Wal-Mart, and Microsoft. Still, middle capitalization stocks will be less risky than the smallest of companies.

Additional Information on Mid Cap Stocks

Middle capitalization stocks are acknowledged as the "forgotten" asset class due to relatively low levels of information and interest pertaining to the group. Mid caps do not carry the name recognition of the large caps, yet do not benefit from the "next big thing" speculation surrounding small cap stocks.

The Standard and Poors (S&P) Mid Cap 400 index tracks the performance of middle capitalization stocks and is a good reference point to identify these companies. From there, investors may contact the investor relations departments to receive additional materials to research.

Mid Cap Stock, Sources:

S & P Mid Cap 400 Index,http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_400/2,3,2,2,0,0,0,0,0,2,1,0,0,0,0,0.html

CNN Money Personal Finance, http://money.cnn.com/pf/

Invostopedia, What Does Mid Cap Mean?, http://www.investopedia.com/terms/m/midcapstock.asp