If you’ve spent time researching which stocks to buy, you may have come across the terms “mid-cap” and “large-cap” stocks. These are two of the most common stock sizes categorizing publicly traded companies. But what do these terms mean? Which one should you invest in? Keep reading to discover all you need to know about mid-cap vs. large-cap stocks.

What does “mid-cap” mean?

The term “mid-cap” typically refers to stocks that are not large-cap stocks, nor are they small-cap stocks. Within the context of the S&P 500 (an index that tracks the performance of the 500 largest publicly traded companies in the US by market capitalization), the term “mid-cap” refers to companies with a market cap between $2 billion and $10 billion. Mid-cap stocks are generally riskier than large-cap stocks because they’re less well known, have less track record, and are therefore less proven. This can make them more volatile, especially when compared to large caps. Because of this, mid-cap stocks often have higher expected returns than large caps. There are several benefits of diversifying with mid-cap stocks. You will get higher expected returns than with large-cap stocks. It will reduce risk compared to large-cap stocks. Also, you will get a higher expected return than short-term government bonds. Finally, investors get a higher expected return than with money market funds.

What does “large-cap” mean?

Large-cap stocks are stocks that are part of the S&P 500. Within the S&P 500, the term “large-cap” refers to companies with a market cap between $10 billion and $100 billion. While mid-caps are riskier than large-caps, large-caps are the least risky type of stock you’ll come across. This is because large caps are the most established and mature business model. The flip side of being so well established is that they’re more mature, making them less likely to see major growth spurts in profit. This makes them less attractive in the short term but less risky in the long term.

Understanding Mid-cap stocks

While there are plenty of examples of large-cap companies that have gone bankrupt over the years, there are barely any examples of mid-cap companies that have gone bankrupt. Mid-cap stocks are more volatile, making them a more appropriate investment for risk-tolerant investors. Small-cap stocks are often underrepresented in investor portfolios and have historically provided higher returns than large-cap stocks.

Emerging markets often have higher expected returns than developed markets, but they also come with higher risks. In the case of REITs, the return varies depending on the real estate market. Still, they are expected to provide a positive return. Most importantly, investors should understand the risks associated with any asset class and diversify their portfolios accordingly. Therefore, it is recommended that you diversify your portfolio with both mid and large-cap stocks. You can invest in mid-cap stocks through mutual funds or exchange-traded funds (ETFs). A simple way to diversify your portfolio is to invest 10% in mid-cap stocks and 90% in large-cap stocks. Investing 10% of your assets in mid-cap stocks comes with higher risk and higher expected returns. Mid-cap stocks often outperform large-cap stocks over the long term.

Understanding Large-cap stocks

Large-cap stocks tend to be less risky than mid-caps because they have a more established record and are less likely to go out of business. It’s worth noting, however, that this doesn’t mean you’ll never see a large-cap company go out of business. It just means that it’s less likely to happen. They are the best option for long-term wealth creation. Large-cap stocks represent the largest companies in any given country. These mega-corporations have worldwide recognition, operate in numerous countries, and produce products consumed worldwide. Because these stocks are so widely held, their risk is very low. Due to their size and influence in the market, these stocks are less likely to be affected by market forces than smaller companies. You can expect a maximum 20–30% return over the long term, which is significantly less than the potential return of small-cap stocks. 

However, the risk associated with large caps is significantly lower than with small caps. They can be a good choice for conservative investors who want a diversified mix of investments but don’t want to take on many risks. Large caps are the largest (most widely held) stocks in any given market. They tend to be blue-chip companies with a track record of strong profits and dividend payments. They’re less volatile than small-caps and mid-cap stocks but carry more risk than government bonds. You can invest in large-cap stocks through mutual funds or exchange-traded funds (ETFs). You can also buy them directly from a broker or financial adviser.

Mid-cap Stocks vs. Large-cap Stocks: Which should you invest in?

Large-cap stocks are your best bet if you’re a conservative investor. If you’re more aggressive and want more upside, then mid-cap stocks are the better choice. Suppose you’re a conservative investor who would like more upside potential. In that case, you could opt to include a mix of both in your portfolio, with the mid-caps making up a larger portion than the large-caps. You may want to do the opposite if you’re a very aggressive investor. But remember that past performance is no guarantee of future performance, and you may experience more downside than you’re comfortable with. Remember that market cap alone is not the only factor you should consider when deciding which is the best type of stock for you. You should also consider other factors such as the business model, management team, sector, and valuation.

You must also evaluate the company’s financial health, risk, dividends, and expected returns. For example, a company with a high market cap could have a lower risk profile and greater expected returns than a low market cap. Therefore, it’s important to diversify your portfolio by investing in various stocks, including both large-cap and small-cap stocks. When deciding which stocks to put in your portfolio, you should consider various factors. What is the company doing? How likely is it to make you money? Is it a risk you are comfortable taking? These are all questions you should ask yourself before investing in any company. You should also consider the company’s earnings per share, dividend yield, and expected growth. When deciding which stock best fits you, you should also consider your risk tolerance.

Small-cap and mid-cap stocks may be riskier than large-cap stocks, but they also offer the potential for higher returns. Keep reading to learn more about choosing the right stock for your portfolio. When choosing a stock, you should also look at the dividend yield, financial strength, and valuation. A high market cap alone may not be enough to justify investing in a particular stock.

Conclusion

Investors should know that mid-cap stocks are riskier than large-cap stocks but have a higher expected return. Large-caps are the better choice if you’re a conservative investor who would like lower expected returns. If you’re an aggressive investor who wants higher expected returns, then mid-caps are the better choice. Suppose you’re a conservative investor who would like a bit more upside. In that case, you could opt to include a mix of both in your portfolio, with mid-caps making up a larger portion than large-caps. If you’re an aggressive investor who wants to reduce risk, you can also include a mix of both but with a larger portion of large caps. Thus, it is best to have both in any financial portfolio when looking at mid-cap stocks vs. large-cap stocks.