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A mid-cap index is a collection of stocks that represents a diversified position on companies of “moderate” value. The mid cap status for a stock is based on market capitalization, or the total value of the company’s outstanding shares. Putting these stocks into an index can help provide better tracking for the sector as a whole, or indicate positions that can help limit volatility.
Mid cap stocks are generally defined as those with a certain market capitalization larger than “small cap” or “micro cap” stocks, and smaller than “large cap” stocks or companies with an extremely large total share value. Some professionals use the general marker of market capitalization between 2 and 10 billion dollars to identify a mid cap stock. These stocks often belong to companies that have established themselves in a certain industry or market, but that still have a lot of potential in front of them for expansion, so that many mid caps offer opportunities for a trading philosophy known as “growth investing,” where investors try to find companies with stocks that are still likely to go higher over time.
It’s important to note that many financial professionals do not recognize a strict definition for stocks with different categories of market capitalization. This means that effectively, telling somebody about a “mid cap” stock is like referring to a “biggie size” menu item at a fast food restaurant. The financial companies that provide mid-cap index products, or other collections of these growth stocks may have their own criteria for what constitutes a mid cap stock or equity.
Some financial professionals like to look at a mid-cap index to determine how the larger “mid cap community” of stocks is performing. Much like other index funds or products, a mid-cap index helps to provide a diversified resource where investors aren’t just limiting their interest to one specific company, but investing in multiple companies with some similar characteristics. Some financial pros and investing experts might recommend building a mid-cap index with stocks from different market sectors like energy, technology, retail, international trade, or medical services. Compiling a mid-cap index or other index helps investors work toward this goal of “hedging” their investments from risk, in this case, so that if one stock suddenly diminishes, the whole total portfolio value does not quickly disintegrate.
Beginning investors can look in detail at these kinds of funds available from brokerages and other financial service institutions. In addition to being diversified, these funds may offer day trading access or other perks. Investors should look at all of the potential fees, commissions and other charges involved in entry into a particular mid-cap index fund to make sure they are rewarded for their risk.
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