What It Is:
A mid cap is generally described as a company with a market capitalization between $2 billion and $10 billion.
How It Works/Example:
Market capitalization is a measure of the market value of a company. If the market value of a company is between $2 billion and $10 billion, then it's considered to be a mid-cap company. Market capitalization is calculated according to the following formula:
[Number of Share Outstanding] X [Stock Price] = Market Capitalization
For example, if a company has a share price of $5 and one billion shares outstanding, it is a mid-cap stock with a market capitalization of $5 billion. Since the market capitalization measures the market value based on the stock price, it changes as the price of the shares fluctuate. Knowing a compnay is a mid cap provides a general idea of the size of a company.
There are several categories of stocks. The categorization (e.g. nano cap, micro cap, small cap, mid cap, large cap, and mega cap) can vary among investment advisors and indices. The categories are only intended to give a general idea of the relative size of the company at a particular point in time.
Why It Matters:
Mid-cap stocks are typically in the middle of their growth curve, with expectations of increases in market share, productivity, and profitability. Since they may be in a growth stage, they are considered less risky than small caps, those companies with less than $1-2 billion in market capitalization. However, mid caps are considered to carry more risk, as a group, than large caps which are those companies with market capitalizations of over $10 billion.
Grouping companies in these categories, of course, is a generalization and does not capture important features, strengths, and weaknesses of specific companies. Investors should look further than a company's market capitalization to assess the potenial risks and returns.