The other day I was having lunch with a friend and he asked me a question, which we keep talking about all the time when it comes to stock. This was a very basic question “What are Mid Cap Stocks” It really caught me unawares. This is what I found out on surfing the net.
The term ‘mid-cap’ originates from the term medium capitalized.
Market capitalization is calculated by multiplying the current stock price with the number of shares outstanding or issued by the company. The definition of mid-cap shares can vary from market to market and from country to country. In case of India, the National Stock Exchange (NSE) defines the mid-cap stocks as stocks whose average six months’ market capitalization is between Rs 75 crore and Rs 750 crore. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in the country.
Mid-cap shares are considered as attractive investment avenues since their growth rate would be faster. However on the flip side, mid-cap shares are of small companies where revenue and profits could be more volatile than large companies. The availability of mid-cap shares in the secondary market is also limited. The promoter holding in these companies is high and there is very little public shareholding. Thus a volatile financial performance and the limited number of shares in the market make investing in mid -cap shares more risky. The other question that popped up was “What are Blue Chips”
The top stocks of the stock market are usually referred to as Blue Chips, the question that would pop up now is which are the top stocks. The general way would be, those stocks which are included in the index of the exchange are Blue Chips.
Generally, a blue chip has a history of solid earnings, regular and increasing dividends, and an impeccable balance sheet.
To summarize Mid-caps have the potential to be tomorrow's blue chips.
But, then again, they may not. Hence, mid-caps carry a higher risk than blue chips. Also, their earnings are much more volatile and neither are they as liquid. If you want to invest in shares but are not too savvy with the market, then blue chips are your best bet. Even if you want to invest in mid-caps, ensure that you have a few blue chips too to balance your risk.
