How Does The Stair-Step Stock Approach Work And When Should You Use It?

Trading in the stock market is a great way to grow your net worth. Whether you're using a tax-advantaged retirement account like a Roth IRA or 401(k) to get in on the action, or trading in a standard brokerage account, investing in the stock market can quickly help you transform your financial picture. But novice investors are often hesitant to jump headfirst into the market. After all, there's plenty of risk involved in stock acquisitions. Solid research strategies and a healthy dose of caution will go a long way as you find your feet here, but it's important to remember that no fortunes were ever made by standing on the sideline forever. Ultimately, you'll need to select investments and pull the trigger to see your money grow.

One way to get over the initial hesitancy of making your first investments is through the stair-step method. This approach to stock trading can limit your exposure to risk while still allowing you to grow your assets and expose your capital to the market. Using the stair-step method is a great option for those testing new market segments, and in a more macro sense, it underpins the approach that all investors and savers use as they continue to grow their portfolio over the long term. Let's jump right in and explore this tool that can help you intelligently navigate the stock market.

Essentially, this method will see you invest in chunks rather than all at once. Suppose you want to put $200 into your brokerage account every month. Some investors might opt to invest $190 right away in one or more company stocks. These traders will be familiar with the marketplace and generally will follow an established strategy that works for them. You, on the other hand, might be looking to get in on dividend generators or ETFs with great growth potential, and simply place buy orders for the same things on a routine basis.

As an alternative, you might opt to deposit $200 every month, and then invest it in two $100 chunks spread out over a longer timeline. A practical option might see you depositing your funds on the first of the month and making your first buy then, and waiting to place the second buy order until the 15th of the month, therefore splitting your investment dates evenly across the month. This isn't the same thing as depositing funds and then waiting to decide on what to invest in.

Adherents of the stair-step method plan the purchases they'll make, and then choose to split buy orders into two or more separate transactions with breathing room between the orders. In addition to providing a bit of risk aversion, there are actually numerous reasons why a stock trader might consider doing this, leaving a portion of their money in liquid capital rather than invested in a targeted fund, company, or other asset.

The stair-step method of trading is a solid choice for newer traders, but it's also a great option when exploring new asset classes or industrial sectors that you're unfamiliar with. The disciplined investment strategy bakes in a hedge against volatility and risk. Spacing out your stock buys allows you to invest a portion of your total commitment today, and then watch the stock asset's performance for a few days or weeks to assess its progress.

In assets you don't have total confidence in yet, this can provide access to the commodity while giving you a bit of security in the fact that if you picked a dud, you won't experience complete exposure to the downside pressure. You can always change course and not invest the remainder of your scheduled capital in that asset. But if you do buy in as one transaction, you'll need to sell the stock to use the money elsewhere, potentially creating a net negative or incurring short-term capital gains taxes — something all traders will want to avoid.

Because of its inherent benefit, this method is also a good approach when the market begins to experience enhanced volatility. The more uncertainty in the market, the greater the risk of loss is. However, this is only really the case if your money is actually invested (and you plan to sell soon). By utilizing the stair-step approach, you can potentially buy in at increasingly lower price points to drive your total cost per share south. It's worth noting though, that if prices rise, you won't get the full benefit of the increase and will instead be investing at higher figures with your subsequent buy-ins. (Read about how to survive a recession and prosper when it's over.)