Categories Investing

What are mid-caps?

With the stock market growing fast, stock mutual funds continue playing an important role.

Mid caps, short for medium capitalization, refer to stocks with a capitalization in between $500 million and $7 billion. To understand properly mid caps, it is important to really distinguish between “small”, “medium” and “large” caps.

Small caps usually refer to really small companies with the capitalization under $500 million. The kinds of companies like that mainly concentrate on the development of promising products. On the contrary, large caps’ possessed capitalization accounts for $7 billion and up.

Mid caps are really in the middle. They have more development management and are more experienced in their markets as compared with small caps, on the one hand, and have more potential for growth against large caps, on the other hand. Mid caps, though, have no such long-term growth potential versus small caps as expansion space on the market is already limited.

Today, such companies as the Washington Post Co., leather-goods maker Coach Inc., Tyson Foods Inc. and homebuilder Lennar Corp. can be referred to as mid caps.

Within the previous five years, mid caps managed to keep the pace as their index was growing approx 8.5% a year. It is slightly less than small caps’ annual 9.6%, but more than 2.2% of large caps.

Growth and value stock funds account for at least 672 funds in the mid-cap range – including mid-cap index funds offered by the Vanguard Group, TIAA- CREF, Dreyfus Corp., Federated Investors Inc. and others.

The Standard & Poor’s 400 Midcap Index lifted at a 12.1% annual rate in the past 15 years through the end of July being a little ahead of both the S&P 500 Index with its large stocks, which added 10.4% a year, and the S&P 600 Smallcap Index upping 9.9% a year.

Specialists say the advantage of mid caps lies in combining of the growth potential of smaller companies with some of the financial strength of larger companies and that is really so.

Apart from above-mentioned, mid caps can also be the type of slowing down company. For instance, Xerox Corp. and Apple Computer Inc., two largest holdings of the Vanguard Mid-Cap Index Fund, once used to be large caps. Still, versus process is also possible.

As a conclusion you should be aware that mid caps (as well as, actually, small caps) often prefer not to pay dividend income placing their earnings back into the company for growth. Total returns, therefore, are mostly influenced by changes in stock prices. Moreover, investors’ attitude to any news about the company and its prospects entirely depends on the degree of company’s being established and well known.

All these aspects may help boost small- and mid-cap funds’ expansion, though with the risks of becoming more unstable.


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