Mid-cap versus large-cap stocks? Navigate benefits and risks before investing

Mid-cap vs large-cap stocks: Investing in mid-cap stocks and large-cap stocks comes with its own set of risks and benefits. It is important to understand these differences to make informed investment decisions. Mid-cap shares offer a higher rate of return when compared to their larger peers as they have tremendous opportunities of growth but at the same time, if they do not produce results as expected by markets they can burn a big hole in investors' pockets.

In Indian stock markets there are numerous stories of mid-cap shares turning out to become multi-baggers and handsomely rewarding investors at the same time there have been instances where mid-caps have turned out to become penny stocks.

Here's a comparison between investing in mid-cap and large-cap shares

Mid-cap stocks are often in the growth phase of their life cycle, which means they have the potential for higher growth rates compared to large-cap stocks and these stocks may be undervalued by the market, presenting opportunities for investors to benefit from capital appreciation.

Mid-caps are often well-positioned to take advantage of niche market opportunities that larger companies might overlook and investing in mid-caps can help diversify your portfolio, reducing the risk associated with having too much exposure to a single asset class.

However, there are risks involved while investing in mid-cap shares. Mid-cap stocks can be more volatile than large-caps, which can lead to larger price swings and potential for losses.

These stocks are also less liquid than compared to large-caps, making it more challenging to buy or sell shares at the desired price.

The companies in mid-cap space have limited resources for research and development, expansion, or surviving economic downturns, which can pose risks during challenging times.

Smaller companies might have less experienced or less capable management teams, increasing the risk of poor decision-making.

On the other hand, large-cap shares are more stable and less prone to extreme price fluctuations than mid-caps. Many large-cap stocks pay timely dividends, providing a source of income for investors.

Companies in large-cap space have substantial resources for research, development, and expansion, reducing the risk of financial instability.

Large-cap stocks are more liquid, making it easier to buy and sell shares at desired prices.

Large-cap stocks may have limited room for rapid growth compared to mid-caps as these companies are well established players amongst their competitors.

Being more established and large enterprises, these companies face market saturation and limited growth opportunities in their core businesses.