Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Pyramiding

What it is:

Pyramiding refers to purchasing additional units of a security with unrealized profits on open trades.

How it works (Example):

Investors engage in pyramiding in order to increase their portfolio position using the paper profits from the rising value of open trades in order to purchase additional units of securities. For instance, if an investor has an open trade for XYZ stock, the market price of which rises substantially, he may use the unrealized excess value to purchase additional units of XYZ on margin.

Why it Matters:

Though an effective use of unrealized profits, pyramiding grows a portfolio very slowly, because profits may not be large enough to purchase many shares and such profits, moreover, occur sporadically and are not reliable.