Medium-cap companies or medium caps are those companies listed in the financial markets that are characterized by having a medium market capitalization.
The market capitalization value that is considered to define a company as a medium cap may vary between different sources of information. However, and in general, the limit could be set between $ 2 billion and $ 10 billion. So, any company that is in this range could be a medium cap.
As the name implies, the medium cap is located between the small cap and the large cap. That is, they will have a capitalization greater than the small cap and a smaller than the large cap. Or what is the same, as low and high capitalization companies.
Advantages of investing in medium caps
There are a number of advantages of medium-sized companies in relation to smaller ones. Among the most important are:
- Less risk The medium cap are companies that usually show a certain degree of businessconsolidation compared to the small cap. Therefore, their sales volume or client portfolio, usually have a more solid base than others of smaller size. Hence, the volatility of these companies is lower. And therefore, they are considered to have less risk than small cap.
- Diversification effect. Many investors choose to build a small, mid and large cap portfolio to diversify their investment portfolios . But investing only in medium cap, that degree of diversification could also be achieved. This is because they have properties in terms of profitability and risk similar to the other two. On the one hand, we would obtain the advantage of a greater capacity for growth that identifies the small cap. And on the other, greater stability or lower volatility typical of large cap. All this translates into that, mid cap could have an optimal combination of profitability and risk.
Disadvantages of the Medium Cap
The main disadvantages or disadvantages of these companies have their nature in the comparison with small and large cap. The difference makes the size.
- On the one hand, and comparing with the small cap, the larger size hurts. This implies that having a larger size, perhaps the potential for profit growth is less. Therefore, an investor who wants to obtain a high return will prefer to invest in small cap.
- On the other hand, and comparing with the large cap, the disadvantage comes from a smaller size. In this case, having a smaller size usually implies that you have a less stable business base. And this is considered in the market as more risky or volatile companies. An investor who seeks stability or is more risk averse will seek to invest in large cap for his investment portfolio.