With the declaration of the first lockdown in March 2020, the secondary markets crashed and triggered large-scale panic. However, the markets recovered just as quickly as they fell. This spectacular recovery was helped largely by strong buying in mid-cap and small-cap stocks.
The S&PBSE mid-cap index which was at 10,219 on April 3, 2020, is in July 2021 trading at 22,813. The small-cap index which was trading at around 9,500 in March-April last year is now at a whopping 25,874. The indices’ meteoric rise shows that investors’ confidence in the Indian markets is far from over.
Before we move on to understanding how to invest in mid-cap stocks, let us look at the parameters a stock has to fulfil to be categorised as a mid-cap or small-cap stock.
What are mid-cap stocks?
Mid-cap stocks are those companies whose total market capitalisation is anywhere between Rs 5,000 crore to Rs 20,000 crore. Whether a stock is categorised as mid-cap or a small-cap stock is also determined by its ranking in the benchmark indices of Nifty and Sensex. For instance, in the Nifty index, all the companies that are ranked from 101st to the 250th company, are considered mid-cap index companies. Investors prefer mid-cap stocks or mid-cap funds as they promise to deliver greater returns in the short term than the large-cap stocks that see growth and capital appreciation in a longer time frame.
What are small-cap stocks?
Small-cap stocks are those whose market capitalisation is less than Rs 5,000 crore. They are relatively smaller in size and the potential for returns is high provided that these companies continue on a steady growth path. If they don’t then there is the possibility that the investments in these companies can turn out to become quite risky and volatile.
The difference in investing in mid-cap vs small-cap stocks
Volatility is a key determinant of whether you should invest in mid-cap or small-cap stocks. Mid-cap stocks are less volatile compared to small-cap stocks, however, their prices also fluctuate highly compared to large-cap stocks. Small-cap stocks by virtue of being minor companies often go unnoticed unless they register impressive growth or have a corporate event on the anvil that generates market buzz. These stocks have low volumes and therefore carry more risks and are far more volatile compared to mid-cap stocks.
The term liquidity here means the capacity of the stock to absorb sudden spells of purchase or selling without large variations in its price. Large-cap stocks are well-known and heavily traded, and therefore their liquidity is high. Mid caps have lesser liquidity than large-cap stocks. Small-cap stocks have the least liquidity and investors who do not transact in these shares via small-cap funds can encounter difficulty in transacting in these shares.
- Growth potential and risks
Mid-cap stocks have high growth potential but an investor needs to have a strong risk tolerance to invest in them. Small-cap stocks have higher growth potential compared to mid-cap stocks but the risks they carry is greater than mid-cap stocks. Investors are advised to exercise caution and do their research before investing in small-cap stocks.
How to invest in mid-cap stocks
If you are interested in investing in mid-cap stocks, all you have to do is open a demat account with Motilal Oswal and register for online trading. The brokerage house releases thorough and rigorous research reports which will steer your capital to the best mid-cap stocks to buy with your savings.
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