When building a stock portfolio, including a diversified group of stock investments can smooth out your returns and reduce the volatility of your investments. By investing in a multi-cap portfolio, you are buying into a combination of companies of various sizes that fall under various categories, such as small-cap, mid-cap and large-cap. A mid-cap investment can be a part of a multi-cap portfolio; the term "mid-cap" refers to a stock investment in a mid-sized company.
Characteristics of Multi-Cap Portfolios
A company’s market capitalization (or "cap" for short) refers to the dollar value of outstanding shares. To calculate market cap, take the number of outstanding shares and multiply by the market price of one share. Large-cap companies are typically companies with approximate market values greater than $10 billion. Mid-caps are companies with a value between $2 and $10 billion, and small-caps fall between $300 million and $2 billion. Micro-caps are in the $50-million to $300-million range; and nano caps, usually referred to as penny stocks, have a value under $50 million.
Advantages & Disadvantages of Multi-Caps
Multi-cap portfolios balance out the risk and reduce the volatility that comes with stock investments. Larger, well-established companies tend to do better during tough economic times than smaller companies, and they can provide a lower, yet stable, investment return. Smaller companies have greater growth potential than larger companies and can provide an investor with greater investment returns. Mid-caps can stabilize portfolio returns with greater growth potential than the larger stocks and less risk than the smaller stocks. Regardless of the company’s size, all stock investments carry the risk of investment loss, and you should closely monitor your investments since business conditions can change daily.
Characteristics of Mid-Caps
Mid-cap stocks belong to mid-sized companies. Since these businesses are smaller than large caps, they may still have room for future growth that can provide an investor with capital gains, if their stock price goes up. Due to their smaller size, mid-caps can have a greater ability to adapt to changes in market and business conditions than large caps. They have also been in business long enough to avoid mistakes usually made by small caps.
Advantages & Disadvantages of Mid-Caps
Mid-caps can be beneficial to a stock portfolio with large- and small-cap stocks. They can provide a better investment value than large caps, which tend to have high market prices. Unlike small-caps, a mid-cap’s larger size can signal that it's at a stage where growth is occurring more slowly and risk and volatility in the stock has decreased. However, like all stock investments, mid-caps still carry a certain amount of risk, which could be higher than the risk associated with large caps.
- John Foxx/Stockbyte/Getty Images