Mid-cap stocks: should you be trading mid-cap companies?

 

Mid-cap stocks are often overlooked by traders, but they can be powerful additions to your portfolio. Let’s examine what mid-cap stocks are and how to trade them.

• What is market capitalisation?
• What does mid cap mean?
• Small vs mid vs large cap
• Why trade mid cap stocks?
• Examples of mid cap companies
• How to trade mid cap stocks
• Mid cap indices
• Mid cap ETFs

What is market capitalisation?

Market capitalisation is a company’s total value on the stock market, calculated by multiplying the total number of shares it has available to trade by its current share price. It’s a useful way of seeing how a company is valued by the markets, beyond its price.

For example, shares in Company XYZ might have a current price of $50. That tells you how much a single share is worth, but not much when it comes to the company itself. However, say that XYZ has 100,000 shares outstanding. 100,000 x 50 is 5,000,000, so the total market capitalisation of the company is $5 million.

Learn more about what a market cap is.

Market caps provide a useful way of comparing stocks. For instance, if Company ABC has a share price of $100, it might look more valuable than XYZ – but if it only has 20,000 shares outstanding then its market cap would actually be much lower.

When you hear talk of Apple and Microsoft becoming trillion-dollar companies, it’s their market cap that’s hitting the headlines.

Investors and analysts use market capitalisation to categorise companies, too: as either large-cap, mid-cap or small-cap stocks. So, what does the mid-cap category contain?

Definition of a mid-cap stock

A mid-cap stock is typically defined as a company with a total market capitalisation between $2 billion and $10 billion. In the UK, it is often defined as a market cap of £1 billion to £5 billion. If you see a stock with a market cap between these values, you’ve found a mid cap.

As you may have guessed, mid cap is short for ‘middle capitalisation’ – or a company that’s not a small-cap or a large-cap stock. And now we know the definition of mid cap, it isn’t hard to work out what constitutes a small and large cap too.

Small vs mid vs large cap

The rough guidelines for categorising small, mid and large-cap companies are as follows:

• Small-cap stocks have a market capitalisation of up to $2 billion (or £1 billion in the UK)
• Mid-cap stocks are worth between $2 billion and $10 billion (£1-£5 billion)
• Large-cap stocks have a value in excess of $10 billion, or £5 billion

While mid-cap stocks are quite closely defined, the two others have much more room for variation. So, some analysts use the additional categories of ‘mega cap’ – for companies worth more than $200 billion – and ‘micro cap’ for stocks worth less than $500 million.

Why trade mid-cap stocks?

There are lots of benefits to targeting companies that aren’t massive conglomerates or tiny penny stocks. Chiefly, they can offer a balance between growth potential and risk.

Most investors look for assets that have high growth potential, as that is what is going to deliver the best return. Blue-chip stocks don’t always offer this, as they have huge market share already – meaning reaping higher and higher profits can be tricky.

Tiny companies, meanwhile, are all about growth potential. You could have the next Apple or Amazon in your portfolio, generating a massive return. However, balancing this is a high degree of risk. Penny stocks are far more likely to go bust and disappear without a trace than blue chips.

Mid caps land somewhere in the middle of this equation. They’re not yet necessarily completely dominant in their field, so they can offer significant room to grow. But they’re still big companies, meaning the risk is generally a bit lower than with a small-cap stock.

Other factors to consider

We wouldn’t recommend picking stocks based on their market cap alone, though. There are lots of other factors that are much more important, such as their revenue, profit, P/E ratio, costs and more.

Whether you’re trading or investing, it’s usually recommended to pursue a diversified portfolio, which means holding a mix of different sizes and types of companies. Many investors choose to buy some high-risk penny stocks, alongside some mid caps and blue chips to aid their risk management.

Examples of mid-cap companies in 2022

Tate & Lyle (LSE:TATE)

Tate & Lyle is a UK supplier of food and beverage ingredients. Originally a sugar refining business, today it specialises in sweeteners, starches, gums and stabilisers derived from raw ingredients such as corn and tapioca – it divested the sugar side of its business in 2010.

In December 2022, Tate & Lyle had a market cap of £3 billion. Its stock trades on the London Stock Exchange and it is a constituent of the FTSE 250 mid-cap index.

Gamestop (NYSE:GME)

Gamestop’s market cap has seen some serious volatility in recent years. The US video game retailer was firmly in small cap territory until 2020, when the Reddit forum r/wallstreetbets began buying up its stock in order to force a short squeeze.

That sent its value skyrocketing above $20 billion, a 2,000% increase. However, since then it has settled into mid cap territory, with a capitalisation of $8 billion in December 2022. Whether it rides high again or drops back into obscurity remains to be seen.

HelloFresh (FWB:HFG)

HelloFresh is a Berlin-based meal kit delivery company with operations across Europe, North America, Oceania and Japan. It is the largest provider of meal kits in the United States.

Like Gamestop, HelloFresh saw significant growth in 2020 – but this time, because the Covid pandemic saw demand for its delivery services hit new highs. Weakening demand since then, though, has seen it return to mid-cap status, with a market value of €4.3 billion at the end of 2022.

How to trade mid-cap stocks

You can trade mid-cap stocks – including all the companies listed above – via CFDs with a FOREX.com account. Follow these steps to get started:

1. Fill out our quick online application form
2. Add some funds to your account
3. Find mid-cap stocks on our web trading platform or mobile apps
4. Choose to buy the company if you think it will rise, or sell it if you think it’s going to fall
5. Add stops and limits, then execute your position
6. Monitor your trade and close it

As you’re trading with CFDs, you won’t actually own any shares in the business itself. You will, however, be able to go long or short on its price and utilise extra tools such as leverage.

If you’ve never traded CFDs before, we’d recommend opening a free demo trading account first. This enables you to test out trading our full range of markets with virtual funds, to see how you perform before graduating to live capital.

You don’t have to trade mid-cap stocks directly, either. With indices and ETFs, you can take your position on 100s of mid caps with a single position.

Mid-cap indices

Mid-cap indices work just like other stock indices, except they track the performance of smaller companies instead of focusing on the biggest companies on an index. Typically, a mid-cap index will feature the public businesses that aren’t quite big enough to list on a benchmark, such as the Dow Jones (Wall Street) or S&P 500 (US SP 500).

Let’s take a look at a few examples.

FTSE 250

The FTSE 250 (UK CBOE 250) is a UK index that tracks the performance of the 101st-350th biggest companies listed on the London Stock Exchange. Essentially, it gives you exposure to the most-valuable stocks in the UK that don’t feature on the FTSE 100.

The top FTSE 250 constituents are generally worth around £4 billion, with the bottom end landing below £500 million – so while there are some small-cap stocks, it is generally considered a mid-cap index.

Often, mid-cap indices give you more domestic exposure than benchmarks. This is the case with the 250, which reflects the UK economy more than the FTSE 100, which has a global outlook.

You can trade the FTSE 250 via CFDs with a FOREX.com account.

MDAX

The MDAX is the FTSE 250 to the DAX’s FTSE 100. It tracks the prices of the 50 companies listed on the Frankfurt Stock Exchange immediately below those present on the DAX 40. Before the DAX expanded to 40 companies, the MDAX had 60 constituents.

Like the FTSE 250, the MDAX features stocks with a more domestic outlook than its bigger sibling. However, there are still several multinationals on the index, including HelloFresh and TeamViewer.

S&P 400

The S&P 400 is the leading mid-cap index in the United States. Unlike the FTSE 250, it doesn’t measure the performance of the 400 next-biggest stocks after the S&P 500. Instead, a company must have a value of between $3.7 billion to $14.6 billion to be added to the index.

The median cap of the index is around $6 billion, giving it a strong mid-cap focus.  However, companies aren’t removed from the index if their capitalisation moves outside of the boundaries, so some small and large stocks are also present.

In December 2022, some key stocks on the index included First Solar, Gamestop and Westlake.

Mid-cap ETFs

Mid-cap exchange-traded funds (ETFs) are investment vehicles that aim to track the price of a mid-cap index. Unlike other types of funds, they’re bought and sold on exchanges, which makes them more flexible and easier to buy and sell.

Some mid-cap ETFs use a headline index, like the FTSE 250 or S&P 400, as their underlying. Some, however, track more niche indices that give you specific exposure.

Examples of mid-cap ETFs include:

iShares Core S&P Mid-Cap ETF (IJH)

This ETF tracks the price of the S&P 400 index we cover above. It is physically replicated, which means that it holds all the stocks in equal weighting to the index in order to track its price movements.

An index is nothing more than a calculation of the price movements of a group of shares, so there’s no traditional underlying market to buy or sell. ETFs like the S&P Mid-Cap enable you to take your position on the index without trading each stock individually.

iShares Russell Mid-Cap Growth ETF (IWP)

The iShares Russell Mid-Cap Growth ETF, on the other hand, tracks the Russell MidCap Growth Index. This index is designed to focus on constituents of the Russell 1000 index that have characteristics which correlate to high growth potential: including high price-to-book ratios, highI/B/E/S forecast growth and high sales per share growth.

Like IJH, IWP holds the stocks on its underlying index. Key constituents include Synopsys, Cadence Design and Autozone.

 With FOREX.com, you can trade mid-cap ETFs via CFDs. Open your account to get started.