Is trading around a core position right for you?

Buy in increments

Thursday, 5 Sep 2013 | 6:40 PM ET

What does it mean to trade around a core position? Mad Money host Jim Cramer shares an example. If you want to buy 100 shares of Google, trading around a core position means buying 25 shares 4 times over a period of weeks.

(Click here for video linked to a searchable transcript of this Mad Money segment)

"Mad Money" is dedicated to investing, that is helping individuals make money over the long-term. However, after learning the basics, some investors start to wade into the deep end of the pool; that is they trade.

Now Jim Cramer feels strongly that individuals can profit from the market substantially and never trade a day in their lives.

However, Cramer also supports anyone who feels familiar enough with the workings of the stock market to trade, that is move in and out of positions over a relatively short amount of time.

If you're thinking about trading or if you're trading already, Cramer says you can invest and trade simultaneously if you trade around a core position.

With this discipline "you can buy more shares of the stocks you like at lower prices and sell more shares when they're flying high," Cramer said.

Here's how it works.

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First identify a stock that you think should have upside potential over the long-term. That is, a company with strong fundamentals, good management, impressive profit margins and bullish price action.

Then Cramer says check out the volatility – that's because this strategy works best with stocks that are somewhat vulnerable to swings in the broad market.

Once you've identified that stock - Cramer says scale into a position. "For example, if you want to own 1000 shares, then buy 250 shares four times over a period of weeks, or even months. That's your core position," Cramer said.

(If you're someone who only invests, you'd stop there and then do homework to determine at what levels you want to take profits.)

However, if you're comfortable trading, Cramer says "every time the stock jumps about 5% sell a fraction of your position – as much as a quarter. "You shave a little off to bring in some profits." As the stock advances, Cramer says continue to pare gains.

Conversely, when the stock declines, you would buy. As long as the decline wasn't due to a catalyst that calls the company's future prospects into question, begin to restore your position on a sell-off. "When the stock trades down to the original level at which you first established the position, you should be 100% in," Cramer said.

That's trading around a core position.

Intrigued?

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The "Mad Money" host said there are two caveats to this strategy. 'I would never want to own less than a hundred shares total, because trading around a smaller position isn't going to make enough money to be worth the risk," said Cramer. Also the strategy works better with low priced stocks, simply because individual investors can usually afford to own more shares.

Again, trading isn't for everyone. There's absolutely nothing wrong with doing homework, establishing a position and then holding a stock as an investment for a year or more. However, if you feel comfortable with trading. Cramer says "you could generate lots of small gains that add up over time."

Call Cramer: 1-800-743-CNBC

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