The FTSE 250 index comprises listed firms with smaller market capitalisations than these within the flagship FTSE 100 index.

That may imply some smaller firms with massive progress prospects are within the index. With much less concentrate on it than the FTSE 100, the index may also supply some potential bargains that not all buyers have noticed. I intention to seek out such bargains – however listed here are a trio of dangers I’m conscious of when doing so.

Complicated cyclical progress with sustainable progress

Some firms are capable of develop their enterprise over the long run. Others develop quick throughout an upwards transfer of their enterprise cycle, earlier than revenues and earnings crash again down when the cycle adjustments.

That may be a danger for firms of any measurement that function in cyclical industries. However smaller companies can, by their very nature, be much less diversified of their operations, magnifying that danger.

For instance, Atalaya Mining Copper SA has carried out brilliantly up to now 5 years. The FTSE 250 share has greater than trebled in worth throughout that interval.

However its concentrate on one foremost metallic (copper) and one foremost manufacturing space (Spain) gives a stage of focus danger completely different to that seen in a FTSE 100 miner like Rio Tinto.

Once I see a FTSE 250 share with a monitor document of progress, I attempt to perceive how sustainable that progress could also be over the long run, together with throughout the financial cycle.

Underestimating the significance of liquidity

When tight instances arrive – as they do infrequently – money is king. Even giant FTSE 100 firms can discover that entry to credit score strains turns into more durable, or dry up altogether.

Getting sufficient liquidity when everybody else is screaming for money may be much more difficult for smaller firms. When investing, I have a look at the steadiness sheet of an organization it doesn’t matter what its measurement.

That definitely consists of FTSE 250 companies. Some spend closely on progress, racking up giant money owed. On the flawed second, that may be lethal.

Avoiding what you don’t perceive

I at all times attempt to keep inside what Warren Buffett refers to as my “circle of competence” when investing.

New, rising firms that develop quick will sometimes enter the FTSE 250 earlier than they ever get near the FTSE 100. So I attempt to watch out to not get sucked into the hype and stick solely to companies I really feel I perceive. That’s necessary as a result of in any other case buyers can not correctly assess their worth as an investor.

For example, my holding in Topps Tiles (LSE:TPT) has not performed nicely, to date. So I’ve needed to contemplate what to do: grasp on, promote, or use a weaker share price to high up my holding within the FTSE 250 constructing supplies provider after its share price fell 10% up to now 12 months.

To try this, I’ve regarded on the firm’s accounts. I take some cheer from sturdy gross sales in recent times, with acquisitions of commerce and digital platforms providing extra scope for progress.

Final 12 months, the agency fell to a £13m web loss and reduce its dividend. I see a danger that weak client confidence may result in much less spending on residence renovation, hurting earnings.

However Topps’ enterprise has began this 12 months encouragingly and I plan to maintain holding the share.