Finding That Middle-of-the-road Investment

Physician's Money DigestOctober 2006
Volume 13
Issue 10

In the search for the proverbial "Goldilocks" choice of the investment world, mid cap stocks may be about as close as some investors can get when looking at market capitalization. And while they may not be "just right" for everyone, mid cap stocks certainly offer a unique, balanced mix of qualities from large and small caps.

The definition of a mid cap varies greatly depending upon who you ask. Some define mid caps as being companies with a market capitalization between $1.5 billion and $5 billion. Others bump that number up a bit and define them as being between $2 billion and $10 billion. In the end, it depends on exactly who you ask. Market capitalization, simply put, is the price of the company's stock, multiplied by the number of shares outstanding. It's basically the value the market places on a company. So what makes mid caps so middle of the road?

Large and Small Cap Stocks

Large caps are generally more glamorous to some experts, because they are perceived as being the safest and most reliable. The prevailing assumption is blue chip stocks are strong and steady—but as Enron and others have shown, that isn't always the case. Risk exists throughout the market, and in some cases, with reduced risk comes reduced growth.

Meanwhile, some small caps can be a bit too bumpy of a ride for many investors. Smaller, less established companies mean there may be a bigger chance for growth, but it also means more volatility. Many investors can't handle the ups and downs that small caps offer. Small caps are often ignored by many analysts and thus don't receive as much attention. Meanwhile, many large cap stocks are frequently highlighted. Mid caps, once again, fall into the middle child category.

A Just-right Investment for Some

Mid cap stocks have become a popular investment of late because of the attractive qualities that many investors see in them. Frequently, the companies are primed for potential growth; at the same time, they've already gone through some of the growing pains that small cap stocks have yet to experience.

Experts say that by the time a company has ventured through life as a small cap, they're often better prepared to handle the market's woes. They've also usually had a chance to put quality management in place and better refine their product and their message—having room for growth, but with fewer growing pains.

The size of the market capitalization you choose to invest in has a great deal to do with your current financial situation and the amount of risk you're willing to tolerate. Meeting with a financial professional to assess your needs and goals is one of the first steps toward establishing a plan for the future. While no one investment is perfect for everyone, certain investments do fit well for people in particular situations.

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