Mid-cap stocks are often overlooked and underrepresented in investment portfolios. With their growth potential and historical performance, they may be the missing piece for investors.
Why should investors consider mid-cap stocks as part of their portfolios? Explore some characteristics of this asset-class.
Despite investors’ affinity for high-flying small-cap stocks and blue-chip large-cap stocks, some mid-cap stocks have provided more favorable risk/return characteristics than their larger and smaller equity peers over time.
Some mid-cap companies tend to be more financially stable than their small-cap counterparts since they have generally moved beyond the volatile start-up phase. As they mature, some of these firms may become as stable as larger-cap companies.
The growth potential of mid-cap stocks, coupled with increased stability when compared to small caps, helps to explain historic competitive performance. There is also evidence that mid- cap firms are less covered by analysts and under-owned by investors. Investors may want to consider exploring whether mid-cap stocks have a place in their portfolio.
Investing in mid-sized companies is based on the premise that relatively smaller companies will increase their earnings and grow into larger, more valuable companies. Historically, mid-cap stocks have experienced greater volatility than other equity asset classes, and they may be less liquid than larger cap stocks. Thus, relative to larger, more liquid stocks, investing in mid-cap stocks involves potentially greater volatility and risk. In addition, mid-cap stocks have experienced greater volatility than other classes of securities. Mid-cap stocks can also be less liquid than those of large companies, and illiquidity increases the potential for volatility. As with all equity investing, there is the risk that a company will not achieve its expected earnings results, or that an unexpected change in the market or within the company will occur, both of which may adversely affect investment results. The biggest risk of equity investing is that returns can fluctuate and investors can lose money.
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