Detailed Coverage of Midcap stocks

Monday, Sep 25, 2023

Being new to the stock market is confusing. It takes a bit of time to get accustomed to all the stock market terms that journalists, investors, bloggers, and financial advisors throw around. Out of all the terminologies that exist, you might have come across the term ‘cap’ the most.

 

Terminologies such as Large-cap stocks, Midcap Stocks, Smallcap Stocks, Market Cap, etc. To better understand the relevance of the term ‘cap’ in the finance aspect, let us go through all the definitions associated in detail and also assess the prominence of the independent existence of each of these.

 

What is ‘Cap’?

 

Cap refers to the word ‘Capitalization’, which in turn refers to the total value in terms of money. What exactly does it mean? Well, all listed companies have outstanding shares. The net value of a company can be calculated by taking the number of outstanding shares (this information is made publicly available) and multiplying it by the price of each share according to the market. This value gives the Market Capitalization of the company of interest.

 

So how is this related to stocks?

 

The value of the total market capitalization is what is used to create this bifurcation. For instance, the Securities Exchange Board of India, also known as SEBI, has created criteria to categorize the companies in terms of their market cap.

 

The top 100 listed companies in India fall under the Large-Cap category. They also possess a market cap greater than Rs 20000 crore. Midcap stocks are the companies with a market cap between Rs 5000 and Rs 20000 crore. Any company with a market cap of less than Rs 5000 crores is termed as a smallcap company.

 

Midcap Stocks Have High Potential

 

Large-cap stocks are the most invested in any economy. This is because of the factor of trust that is associated with these firms. Although they are trustworthy, they still can be volatile if there were to be some bad news associated with the brand name. That’s a big if. Most times, large-cap stocks are highly dependable. They are also extremely stable and resilient.

 

So, is that it? Investing in Large-cap Stocks is the solution?

 

Not quite. Though they’re stable, the growth potential is actually extremely limited. The year-on-year growth of a large-cap firm is usually a constant linear function with a slope that is very gentle.

 

What about Small Cap then?

 

Since the market cap of these firms is small, that would mean that they will acquire more market share with time and are supposed to have an exponential growth factor year-on-year. This is definitely true. But the fact of the matter is that this is a risky bet. Out of the hundreds, if not, thousands of smallcap companies that exist, few might go under. Even the best investment firms in the world lose out on their bets more than 60% of the time.

 

Enter Midcaps!

 

Are midcap stocks better than large-cap stocks? It depends on who you ask. Most investment strategies are dependent on the type of investor and the type of goals that one has. If you have an extremely aggressive investment mindset, then smallcap stocks might be apt but it’ll take you on an emotional spin for sure i.e., in the shorter term, although, if researched right, small caps can be extremely lucrative as they have the potential for amassing large gains in a short span of time and on the contrary, if you’re a long-term investor with a low-risk appetite, and do not care for the emotional turbulence that you might have to endure if your capital is vested in the small caps, you will begin to think that investing in smallcap is actually a very attractive proposition.

 

Large caps have already attained stability. It isn't at a stage to attain hockey stick-type growth, unlike mid caps which have a higher probability.

 

Small caps on the other hand have good potential, but they come under high risk for a reason that their stability and cash flows are lumpy.

 

You can hitch along the success wave that midcap companies are surfing on and make a safe bet while maximizing the potential return on your investment

 

Notable Points:

  1. Midcaps, although riskier than Largecaps, have a safe growth potential.

 

  1. Midcap stocks have good volatility and good liquidity as well. So, you don’t need to be worried that your funds are tied up!

 

  1. Midcaps are suitable for investors who want to invest in mediums that have a good return track record while ensuring the safety of their investments.

 

  1. Midcap stocks are better than large-cap stocks if you’re willing to take on a greater calculated risk to make more returns


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