5 money-making tips for investment in FTSE’s mid-cap stocks

Summary

• FTSE 250 has vastly outperformed the headline index FTSE 100 in the last seven months.
• A moderate diversification is always advisable as it spreads the risks of all underlying securities in a portfolio
• The ideas promising lucrative returns, overnight gains or very quick yields are nothing but differently structured ponzi schemes

UK stock markets have remained highly volatile after the knee-jerk plunge in the February-March period this year with the benchmark index FTSE 100 oscillating in a broad range of between 4,500 and 6,600 since March-end.

The FTSE 100 has registered a gain of nearly 20 per cent to 5,946.25 as on 7 October from the bottom of 4,993.89 made on 23 March. A few large-cap to small-cap stocks and several other market-based indices have outperformed the FTSE 100 in the meantime soaring up to 50 per cent.

Surprisingly, FTSE 250 has vastly outperformed the headline index FTSE 100 in the corresponding time. The FTSE 250, the mid-cap index constituting the stocks with lower market capitalisation, has jumped nearly 40 per cent to 17,801.75 from a level of 12,829.70 made on 19 March. 

The decision of investing one’s hard-earned money in stock markets has always been quite difficult with the presence of hundreds of actively traded shares and innumerous news developments around the underlying parent companies. There can be multiple investment strategies in stock markets but the art of taking a sizable position in the right stock at the right time is widely looked upon. As most of the people keenly look around for promising stock opportunities for short-term, as well as long-term investment, we take a look at five money-making tips for investment in FTSE’s mid-cap stocks. 

Historical performance

The past performance of a share or an index is the first and foremost thing that attracts an investor’s attention towards it. Examining the historical performance of a share is somewhere important but its not necessarily required as a positive past behaviour doesn’t imply that the stock will perform better in the near future or in long-term. 

As far as the mid-cap stocks are concerned, a number of mid-cap shares grab attention after their unexceptional stock market performance. However, a price-wise study of a stock can reveal multiple details such as trading volumes, the applicable circuit limits on the stock, and the extreme highs and lows made in a given time frame.

Further, the stock’s reaction to different periodic market announcements such as Bank of England’s interest rate decision, the buying/selling patterns of foreign portfolio investors, the trading tweaks announced by the Financial Conduct Authority, and several other relative movements can be briefly assessed by studying the historical performance. 

Let us now take a look at five tips to make money at the FTSE 250 index of the LST.

What to look for

Following conventional market advice and other unsolicited stock-specific investment suggestions can result in extreme losses. It has been often seen that the frequency of recommendations and unrequested tip-offs around an emerging stock rises unconditionally. 

The number of such spontaneous recommendations revolve heavily around mid-cap stocks whenever there is a regular spurt in the trading volume or a sharp surge in the share prices. Investors should try to stick to their independent decision while allocating a definitive amount in stock markets. 

A self-conducted research on any stock followed by an independently formulated investment decision can be more fruitful as compared to a bunch of unwarranted advice from unknown people. 

In the end, the decision to buy a stock or any tradable security should be taken in-line with your respective investment objective, the availability of funds, the funds readily available to be blocked for the investment duration, the upcoming personal, as well as family requirements and various other factors. A herd mentality should be strictly avoided when it comes to stock market investment. 

Investing according to risk-taking capacity

Further, all the investments should be done after due estimation of your independent risk-taking ability. Any investment instrument should not be considered based on its prospects without factoring in the risk it is carrying and various other exposures to risk. Individuals should invest within their risk-bearing capacities, no matter how promising returns a stock is offering in the near-term. 

A high-return security also carries a risk which is largely like the proportion of returns if not larger than it. Investors should rather stay put in the investment options which are relatively less risky or carry a definitive risk according to their respective risk profiles. 

The ideas promising lucrative returns, overnight gains or very quick yields are nothing but differently structured ponzi schemes. Investors willing to take substantial positions in the mid-cap stocks are likely to come across such things at a higher rate as the level of manipulation and double dealing is quite high in mid-cap stocks possibly due to lower surveillance.

Diversifying risk

The age-old practice of diversifying the risk across various similar and relatable securities is always a good idea. There is a relatively higher chance of improved returns and less risk when the complete investment is divided into various shares of different companies of varied sectors operating with numerous disticitive customers. A moderate diversification is always advisable as it spreads the risks of all underlying securities in a portfolio. 

A portfolio consisting of different mid-cap stocks can yield a higher yield as compared to a large quantum invested into a single mid-cap stock. Moreover, with different options of stocks, an investor has the right and abundance of possibility to time the entry and exit in separate shares. 

Avoiding the urge to make a quick buck

There are instances when investors have intentionally held particular stocks for more gains beyond their investment horizon but the time extension has led to negative returns. 

A stock or any tradable security should be sold off after realising the definitive gain as estimated at the time of investment. A period beyond your expected duration may square off your profits made by certain time-specific calculations. 

A decision to remain invested in a stock should be taken after properly scrutinising the present market conditions and the favourability of the stock with the ongoing market volatility.