Pyramid Style Buying (金字塔买入法)
One of the biggest problem for investors is when to buy a stock, will the current entry price be too high or too low? In order to solve this problem, the writer introduces pyramid-style buying, where you buy a stock based on this hierarchy.
So, how should one operate using this style of buying stocks? Let say Stock A is currently trading at RM1.00, and is a relatively average price to enter. However, you are scared of it dropping lower, and also scared of it going up before you bought the stock. Hence, investors shall try to use this buying style, where you separate your intended buying amount into 3 parts, with the ratio 1:2:3. Let say you have RM6k and since Stock A is trading at an average price, investors can try to put RM2k into it, meaning you put 33% of your intended holding amount into the stock first.
The stock will then have two different routes, where it may go up or down. If it goes down, investors should use another RM3k to average down their cost, summing the total holding to RM5k. On the other hand, if the stock goes up, investors can use RM1k to bring up the quantities, but not too much of the cost.
The reason for the writer to follow this style of buying because investors nowadays tend to go the other way round, where they bought Stock A with RM2k at RM1.00, but add another RM3k when the price goes up. This will lead to a higher average cost, and investors may earn lesser or even suffer losses when the price dropped down. The examples will be shown in the figures below.
In short, pyramid-style buying allows investors to remain their average cost as low as possible, while increasing the holding quantity at the same time. However, doing it the other way round may increase the risk, hence easier to suffer losses.
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