To explain one of the most basic and useful disciplines, Jim Cramer on Tuesday enlightened his viewers on how to trade around a core position.
Cramer said investors should start by picking a stock they have an opinion on. They should believe the stock could go higher over the long term. It should be a great underlying company with a stock that could get tossed around by market volatility, but nevertheless has potential to push higher in the long haul.
(RELATED: Cramer’s Stock Picking Secrets Revealed)
To illustrate his point, Cramer gave the example of an investor who owns 300 shares of a stock that’s trading at $100 a share. When the stock jumps 3 points, or 3 percent, the investor sells 50 shares to make some profits. Once the stock reaches $109 a share, then, the investor would own 160 shares. At that point, the investor would wait for the stock to be knocked down, so they can buy more shares.
When the stock does fall, Cramer recommends buying in increments. Since the investor in this example started with 300 shares, Cramer said they should continue using increments of 50 to buy it back. So if the stock falls to the $103 level, the investor should buy 50 shares. If it goes to $100, they should buy another 50 shares.
“This might appear to be small potatoes: up 3 percent sell 50 shares, down 3 percent buy 50 shares, up 3 percent sell them again, but over time your profits add up and that's what trading around a core position is all about,” Cramer said. “A lot of people think that trading is incredibly exciting and it can be, but if you're good at trading around a core position, you should be pretty bored because all you're doing is watching the stock move and trimming or adding to your position accordingly.”
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