Main points

• Mid-cap refers to companies with a market capitalization between $2 billion and$10 billion.
• For companies, the attraction of mid-cap companies is that they are expected to grow and increase profits, market share and productivity; they are in the middle of the growth curve.
• Mid-cap stocks have a unique role in portfolio diversification because they offer a balance of growth and stability.

Understanding mid-cap market cap

Companies have two main ways to raise capital when they need it: through debt or equity. Debt needs to be repaid, but can generally be borrowed at a lower interest rate than equity (due to tax advantages). The cost of equity may be higher but does not need to be repaid in times of crisis. Therefore, companies strive to achieve a balance between debt and equity, which is known as the company's capital structure. Capital structure, especially equity capital structure, can provide investors with important information about a company's growth prospects.

One way to understand a company's capital structure and market depth is to calculate market capitalization. Lower market capitalization companies, also known as small-cap companies, have a market capitalization of $2 billion or less. Large-cap companies have market capitalization above$10 billion, while mid-cap companies fall somewhere in between (market capitalization between $2 billion and$10 billion). For clarity, the market capitalization categories have also added mega-cap (more than $200 billion), micro-cap ($50 million to $500 million) and nano-cap (less than$50 million).

For investors, mid-cap companies can be attractive because they are expected to grow and improve profits, market share, and productivity; they are in a growth phase. Since they are still considered to be in the growth stage, they are considered less risky than small-cap companies, but higher than large-cap companies. Successful mid-cap companies face the risk of rising market capitalization, primarily due to rising share prices, taking them out of the "mid-cap" category.

Although a company's market capitalization depends on market price, a stock trading above $10isnotnecessarilyamid-capstock\mathrm{.}Tocalculatemarketcapitalization,analystsmultiplythecurrentmarketpricebythecurrentnumberofsharesoutstand$1, its market capitalization is $10 billion. If Company B has 1 billion shares outstanding and its share price is$5, its market capitalization is $5 billion. Even though Company A has a lower share price, its market capitalization is higher than Company B. Although Company B's share price is higher, its outstanding shares are only one-tenth of Company A's.

Advantages of mid-cap market cap

Most financial advisors recommend that the key to reducing risk is building a diversified portfolio; investors should have a mix of small, mid-cap and large-cap stocks. However, some investors also view mid-cap stocks as a way to diversify risk. Small-cap stocks offer the greatest growth potential, but growth comes with the greatest risk. Large-cap stocks offer the most stability, but have relatively lower growth prospects. Mid-cap stocks represent a hybrid of the two, offering a balance of growth and stability.

No one can predict exactly when the market will favor a particular type of company, whether large, mid-cap or small-cap. Therefore, as we mentioned earlier, it is important to diversify your portfolio. But the proportion of mid-cap stocks you want to invest in depends on your specific goals and risk tolerance.

However, mid-cap companies have many advantages that investors can consider. When interest rates are low and capital is cheap, company growth is usually more stable. Mid-cap companies generally have access to the credit they need to grow and perform well during the expansion phase of the business cycle.

Mid-cap companies are less risky than small-cap companies, which means they perform relatively well financially during times of economic turmoil. Additionally, many mid-cap companies are well-known, often focused on a specific area and have been around long enough to occupy a niche in their target market. Finally, because they are riskier than large cap companies, they may have higher returns, which may be more attractive to less risk-prone investors.

Investors can buy shares of mid-cap companies directly or buy mid-cap funds that focus on mid-cap companies as investment vehicles.

About TheQuantHackers

TheQuantHackers is a cutting-edge community composed of a group of people from the world's top universities and quantitative finance practitioners, dedicated to exploring the infinite possibilities in the fields of artificial intelligence (AI) and quantification (Quant). Our team members come from world-renowned universities such as the University of Cambridge, Oxford University, Harvard University, ETH Zurich, Peking University, and the University of Science and Technology of China. Our external consultants come from first-class companies such as Microsoft, HSBC, Citadel, Man Group, Citi, Jump Trading, and top domestic private equity companies.