Large Cap Vs. Mid Cap

by Leslie McClintock

    The term "mid cap" refers to established, generally publicly traded companies that are too small to be considered "large cap" but are larger than what we normally consider small-cap. The term "cap" refers to "market capitalization." The size of these companies is defined by the total outstanding market value of their stock.

    Publicly traded companies issue shares of stock on one or more stock exchanges, such as the New York Stock Exchange or the NASDAQ. Market capitalization is equal to the total number of shares outstanding multiplied by the share price. A company's market capitalization can therefore change every day, depending on the movement of the stock price. In theory, the market capitalization reflects the total value of a company if an investor were to buy up every share on the market today at prevailing prices.

    While there is no hard and fast rule defining what constitutes a mid-cap stock, one useful benchmark defining the upper limit of the mid-cap range comes from the Standard & Poor's 500 Index. The S&P 500 consists of the largest 500 companies, in terms of market cap, traded on the New York Stock Exchange. It's a generally accepted benchmark approximating the returns of large-cap stocks. Mid-cap stocks comprise publicly traded stocks too small for the S&P 500 but too large to be considered small caps.

    The Russell Mid Cap index tracks the performance of the 800 smallest companies in the Russell 1000 Index. Russell's methodology considers the top 200 publicly traded stocks as large cap and the next 800 companies ranked by market capitalization as mid cap. The result is a range of valuations from approximately $2 billion to approximately $10 billion to $12 billion, though this can change over time. The next 2000 smaller companies comprise the Russell 2000 index of small-cap stocks. Note that different analysts can use very different cutoff points to define large and small market capitalization, and there is no real consensus on defining the term.

    Mid-cap stocks don't tend to have the same kind of market dominance in their niches as large-cap stocks, but they tend to be more established than small-cap and micro-cap stocks. As such, they are less volatile in bear markets than small-cap stocks, in the aggregate, but are usually not considered "defensive stocks," or safe havens in bear markets. Their market characteristics tend to be highly correlated with large-cap returns, but they may be available at slightly cheaper valuations due to the existence of the "large-cap premium," which refers to the phenomenon of large-cap companies trading at higher price/earnings ratios because of their size.

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    About the Author

    Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.

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