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TeachMeFinance.com - explain Pyramiding historic definition...
Pyramiding -- A system of enlarging operations by use of
paper profits (profits in transactions not yet closed and consequently
not yet in hand).
Illustration : One hundred shares of stock of the par value
of 100 is bought at 10 on a margin of 5 per cent. The stock
advances to 15. There is a profit of 5 per cent which can be
used as margin in the purchase of 100 shares more. The price
goes up to 20. There is then a profit of 5 per cent on the
second lot and an additional profit of 5 per cent on the first
lot, so that there is an unencumbered profit of 10 per cent on
loo shares or 5 per cent on 200 shares. The profit is utilized
as margin for the purchase of 200 shares more. The price goes
up to 25. Then there is an unencumbered profit of 5 per cent
on the whole 400 shares or 20 per cent on 100 shares. This
profit is used to buy 400 shares more.
Then, perhaps, the price drops back to 20. There being
only 5 per cent margin on the whole 800 shares the whole accumulated
profit of $3,500 disappears, as well as the margin of
5 per cent provided for the purchase of the first 100 shares.
Should the price go on up to 30, however, the profits would
be increased by $4,000 which would provide 5 per cent margin
for 800 shares more of stock, making the total amount of stock
held 1,600 shares 1,500 of which would have been purchased
with profits.
Selling stock at intervals on a decline, using profits for
margin, is pyramiding, as well as buying it on profits on an
advance.
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