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When To Buy Growth Stocks: How Pyramiding Up Can Be As Easy As A Cup Of Coffee

When to buy growth stocks the right way? Think about the moment you drink a cup of freshly brewed hot coffee. You can avoid getting burned badly by taking sips instead of just gulping it down.

Take a similar approach with hot growth stocks. If you find a stock with top-notch fundamentals and technicals, don't jump in all at once. Start by using a portion of your allotted capital for the trade. Then build up into a full position as the stock rises. This process is called "pyramiding" into a position. It helps reduce risk.

Investors can use all of their allocated capital and buy their entire position at one time. But just be aware that while you can make more money this way, you can also quickly lose more money by going all-in.For example, if you use Rs 10,000 to buy 200 shares of a Rs 50 stock, then all of your initial investments are at risk. If the stock falls 8% and you adhere to the golden rule of investing, you'd lose Rs 800. If you started with half of a Rs 10,000 position, or Rs 5,000, you'd lose less if you were forced to cut losses at 8%.

When To Buy Growth Stocks: The Art Of The Pyramid Purchase

Pyramiding involves making multiple purchases to build your position. You can divide your purchases into three installments.

For your first buy, use half of your maximum capital that you would allocate for a single stock investment. So, if you have Rs 10,000 to invest, use Rs 5,000 for your initial position. Start things off right by buying a leader once it goes through the proper buy point of a good base in volume that's at least 40% above average.

Only buy more shares if the stock moves 2.0% to 2.5% above your initial purchase price. If it does, use 30% of your allotted capital for your second buy. Now you're 80% invested. If the stock goes up another 2.0% to 2.5% from your second buy point, use the remaining 20% of your allocated capital for your final buy. Now you're fully invested and the stock is acting right.

Pyramiding is smarter, as you're putting more money to work only after a stock has proven that it can go higher. What you are essentially doing is averaging up, the opposite of averaging down. The latter is often a losing proposition.

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Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

Performance computations reflect a time-weighted rate of return and includes a brokerage of 0.5%. All holdings are rebalanced to equal rupee amounts daily. Dividends are not considered in computations. Percent gains and losses are calculated for all issues that remain on the “Current Holdings” at the end of the day. For stocks that were added to “Current Holdings”, the basis used to calculate the percent change is the price noted when the issue appeared as a “Current Holdings” in MarketSmith India. For stocks that were removed, the selling price used to calculate the percent is the price note d when the issue appeared as “Removed” in the MarketSmith India. For more information, see our Legal disclosures here.

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