By William O’Neil India
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, do not 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 Rs 50 stock, then all of your initial investments are at risk. If the stock falls 8 percent and you adhere to the golden rule of investing, you'd lose Rs 800.
If you started with half of Rs 10,000 position, or Rs 5,000, you would lose less if you were forced to cut losses at 8 percent.
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 the volume that's at least 40 percent above average.
Only buy more shares if the stock moves 2 percent to 2.5 percent above your initial purchase price. If it does, use 30 percent of your allotted capital for your second buy.
Now, you are 80 percent invested. If the stock goes up by another 2 percent to 2.5 percent from your second buy point, use the remaining 20 percent of your allocated capital for your final buy.
Now you are 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.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.