he other day I was with some people when everyone began discussing mid-caps. They seemed unanimous on the fact that it was the best way to make money in today's stock market.
They are the next blue chips, said the person next to me. In four to five years, all those who invested in mid-caps will be reaping big gains, he concluded.
Or big losses, he forgot to add.
Here's a look at mid-caps, the season's new flavour.
Tomorrow's blue chips?
If the number of shares in a company is multiplied by its current price, the result is market capitalisation.
Blue chips are the largest companies in their sectors; the ones with the largest market cap.
If you can identify tomorrow's blue chips today, you could make a pile of money.
That's because these stocks, with smaller market caps, are usually priced low, since investors have not yet discovered their potential.
In the mid-cap segment, you may find such companies.
In fact, big investors, like mutual funds and Foreign Institutional Investors, have started investing in mid-caps in recent months, because the price of large caps has increased.
That has led to a big rally in small and mid-caps, with their prices climbing upwards steadily.
The mid-cap segment of the stock market is, thus, being increasingly perceived as an attractive investment segment with high growth potential.
What is a mid-cap stock?
Consider the National Stock Exchange's Mid-Cap Index. This defines a mid-cap stock as having an average six months market cap between Rs 75 crore (Rs 750 million) and Rs 750 crore (Rs 7.5 billion).
The Bombay Stock Exchange Mid-Cap Index has 231 companies, with the highest average market cap at the time of starting the index at Rs 2,476 crore (Rs 24.76 billion) and the lowest Rs 418 crore (Rs 4.18 billion).
There have also been plenty of mid-cap mutual funds lately. Each one defines its own criteria in the offer document.
The BSE Small-Cap Index has 425 companies, with the highest average market capitalisation at around Rs 417 crore (Rs 4.17 billion) and the lowest at Rs 53 crore (Rs 530 million).
Are they worthwhile investments?
Undoubtedly, mid-caps have the potential to deliver very high returns. But, it is important to realise that high returns always come with high risk.
The mid-cap (especially the small-cap), companies are more susceptible to the vagaries of the business cycle than larger companies. So their profits and earnings could really dip.
Also, since they are smaller, it is difficult for large investors to get in (buy) and out (sell) of them. If you want to sell, you may not get a good price. Ditto if you want to buy.
Some of these stocks are rigged by promoters and brokers acting in collusion. They may buy and ensure the price goes up. And, suddenly, when it has reached the target they are looking at, they sell and the price begins to tumble.
A small investor who bought the shares when they were at a high will be caught unawares when the price tumbles.
You can make money. In fact lots of money. But how much you invest in mid-caps depends on how much of risk you are willing to take.
Remember, all mid-caps are not tomorrow's large-caps.
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