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What are mid cap stocks?
Investors who want to minimise risk in their share market portfolio usually allocate a significant portion to blue chip shares; however, this type of strategy often sacrifices diversification and potential returns.
What are mid cap stocks?
Investors who want to minimise risk in their share market portfolio usually allocate a significant portion to blue chip shares; however, this type of strategy often sacrifices diversification and potential returns.
While the Australian Securities Exchange (ASX) blue chips have demonstrated their ability to weather the volatile market, some financial experts recommend balancing shares portfolios by investing in the mid-cap sector.
This is because mid-cap stocks offer a certain degree of stability similar to blue chips, but since mid-cap companies often have more room for growth, it can result in potentially higher returns.
Here’s what mid-cap stocks are and how they can help investors achieve a more stable, diversified and growth-oriented portfolio.
How to find mid-cap stocks
Selecting mid-cap businesses to invest in from the thousands of listed companies in the ASX can be difficult, especially since there is a thin line separating mid from small-caps—the main reason some investors get confused.
There are several ways to identify mid-cap companies, and the list could change depending on which definition the investor applies. To simplify things, here are two of the most common ways to identify mid-cap stocks.
Mid-cap market capitalisation
The ‘cap’ in mid-cap actually refers to a company’s market capitalisation, which should range between that of small and large-cap businesses. However, the range can change depending on the financial manager.
Some estimate the capitalisation to range between $400 million and $1 billion, while others place it between $2 billion and $10 billion. Either way, a mid-cap company’s market capitalisation must fall between the small-cap maximum and large-cap minimum.
To compute for a company’s market capitalisation, simply multiply the share price with its number of outstanding shares.
For example, a listed company with 500 million outstanding shares that is currently trading at $5 has a market capitalisation of $2.5 billion.
The S&P Australian Index Committee (AIC) however, further simplifies the identification process through the ASX 100 index.
ASX indexes and rankings
Specific ASX indexes can help investors identify mid-cap companies.
The ‘S&P/ASX MidCap 50 index’ contains a pool of 50 eligible companies listed on the ASX. The S&P AIC carries out periodic assessments to determine whether the composition would remain or change.
MidCap 50 covers companies which are ranked numbers 51 to 100 in the S&P/ASX 100 index.
Other fund managers may deviate a bit from the ASX ranking depending on its required market capitalisation but their mid-cap portfolios usually overlap with ASX rankings.
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