Mad Money

The right price: Cramer's strategy for buying stocks

Cramer: Be patient, wait for right pitch
Cramer: Be patient, wait for right pitch

There are plenty of mistakes that investors can make in the stock market. But of all them, this is perhaps most trecherous.

No matter how attractive a stock may be, no matter how well run a company is or how great the balance sheet is, it's absolutely critical that you know how to play the price is right!

No, Jim Cramer doesn't mean become a contestant on the game show; he means learn how to buy stocks at a fair price, "without going over."

"You could have a fantastic idea, but if you get the wrong price, you'll get more than a buzzer and a frown from a pretty model. You may not make any money at all," Cramer warned.

"That's true whether you're making a short-term trade, or purchasing something that you expect to hold for years and years."

And that begs the question, how will you know when the price is right?

Cramer's answer may surprise you; you won't. "You're never going to get an all-clear signal from the market telling you that it's time to buy," said the "Mad Money" host.

But that doesn't mean you can't get the right price. You absolutely can, if you adopt a strategy widely used by Cramer, as well as other Wall Street pros.

Tim Macpherson | Stone | Getty Images

Play the range game, that's an homage to the other "Price is Right."

In other words, allocate a certain percentage of your portfolio to the stock and then buy at intervals.

"Load up gently and over time. If you build up your position in small increments, patiently picking up more shares over weeks and months," you will by default avoid paying the wrong price, Cramer explained.

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The key to this strategy is to determine a range at which you believe a stock is attractively priced. Sometimes the stock will trade at the high end of the range and sometimes the low end.

But if you buy in increments, you're average price will be fair.

That's all there is to it. Oh, just one more thing; remember to spay and neuter your pets!

(Click for video of this Mad Money segment)

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