When it comes to choosing stock investments for a portfolio, many focus on the dichotomy between safety and growth. If you want a portfolio that is considered “less risky,” you go with large caps that offer you the security of venerable blue-chip companies that are likely to be around for a while. If you are looking for growth, however, you concentrate on small cap stocks. They have the chance to provide dramatic returns, but they are considered riskier than the large caps, and you could lose out.
Stuck between these two choices, many investors neglect the possibility of mid cap stocks. These are stocks that can offer something of a happy medium, if carefully chosen.
What are Mid Caps?
The type of “cap” that stocks have refer to market capitalization. This means how much market value a company has. A large cap stock is one that has a market value of more than $10 billion. A large cap stock or index can offer a decent base for your portfolio, and many large caps pay regular dividends. While they don’t offer dramatic growth, they can offer regular returns.
Small caps, on the other hand, are companies with values of under $1 billion. Many think that these types of companies have room to grow. Investing in them means taking a bigger chance, though. Small caps don’t often have the establish staying power of large cap stocks.
In the middle, though, are mid cap stocks. Mid caps are generally those that have market values of between $1 billion and $10 billion. They offer you an interesting opportunity to get some of the benefits of large caps and small caps.
Mid caps provide you with an opportunity for growth. Because they still aren’t considered “big,” mid caps have room to increase in value, and you could see some growth. At the same time, though, mid caps are large enough that you can see how they have had some success in the past. There is often a level of stability that isn’t always seen with small cap stocks. Mid caps offer you the chance to see more growth than you might see with large caps, while at the same time offering less risk than what you often see with small caps.
Don’t Stock Pick; Look at Indexing
Even with the benefits of mid caps, though, some investors remain wary — and for good reason. Stock picking is always a tricky proposition. While mid caps offer promise, every investment comes with risk. You never know when something will tank (although looking at the fundamentals can help you avoid most disasters).
Instead of trying to pick stocks, though, you can derive benefits from investing in indexes. There are index funds and other funds that offer you the chance to invest in a variety of mid caps without having to pick and choose amongst individual stocks. Plus, this strategy works well with dollar cost averaging. If you only have limited monthly funds to invest, dollar cost averaging with a mid cap fund can help you improve your overall performance over time.
As always, though, it is important to do your research ahead of time. Even the best investments can lose value, and you have to be prepared to take that risk.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.