Cascading Investment Strategy
People just starting out in the world of investing usually have limited funds to allocate. There are several strategies that help investors just starting out to cascade and grow their small investments to larger investments that allow more diversification. Let’s look at a few of these strategies.
- Start with low priced stocks, generally between $2 and $8. This will allow you to purchase more shares. Do not sacrifice the quality of a low priced stocks however. Look for solid companies that have had their stock price either beaten down by economic news, or smaller sized companies with strong earnings growth potential.
- Split your funds up across multiple stocks at low price points. For example, buy several stocks below the $5 price point can yield you more diversification. If you have $1000 to invest, you could purchase 100 shares of 2 stocks priced at $5 or below, or just 100 shares of 1 stock priced at $10. Immediately you can see the benefit of spreading the risk across two investments verses putting all your funds in one basket per say.
- Generally, lower prices stocks have larger percent gains. For example, if a $5 stock goes up just $1, that is a 20% gain. Whereas a $20 stock would have to go up $4 and a $50 stock would have to go up $10 to achieve the same gain.
Now to cascading your investments. The beauty of purchasing low priced stocks is that you can purchase them, watch them potentially grow quicker than higher priced stocks, and sell off the gain portion. For example, say you purchased two $5 stocks. Let’s say they both go up just $2. That’s a $4 return, or 40% overall. You then could sell off enough shares to cover your $4 gain, and purchase an additional low priced $4 stock. This way you will now be diversified in 3 stocks, and have used the profit from the other stocks to purchase the new stock. This is a great way to grow your stock portfolio. Of course it depends on the market conditions and companies you invest in. However over time, this strategy can be extremely beneficial.