PraveenP, your suggestion to use the stop loss principle at X% drop in value hits upon an OLD problem: repetive buying of stocks that loses value. . .a viscious circle.
In your example you propose to sell off the remainder of the stock that has already dropped X% of its initial $ 4000 value and then buying $ 45 of a new stock. Let's see if I understand it with x=10%
Stock XYZ was 4000
Now it is 3600 at 10% drop and you sell the 3600 and add 900 cash to buy 4500 of Stock ZYX and then set the X= 10% again. Now, for the moment neglecting stock-picking skills there is a good probability the stock ZYX begins to drop right away for the same reason Stock XYX was dropping in value. . .so in a little while Stock ZYX is worth 4050 and the Buy Advice stand at 563(same proportion as before) then you bail out from ZYX and buy a Stock YZX for the amount 5063 using the same methodology and then you wait for the next 10% drop . . . .this is a well known trap for this system if you do not look beyond the automatic management system on which AIM is based.
So, again one needs to apply additional information for good investment results and one needs to bail out only if the stock is no longer worth owning.
In my example the 2x 10% drop on two different stocks would have been better taken on the original Stock XYZ:
4000*0,9= 3600 Buy Order - 500
(3600+900)*0,9 = 4050 after the first 10% drop & Buy Order = 563
(4050+563)*0,9 = 4152
Total extra investment = 1063 in two 10% drops in value of the same stock.
The advantage here is the third round having waited again for a 10% drop in price the share-value of the Stock XYZ is now (0,9)^3 =0,729 of the original price and the third buy gives you the extra stock at bargain basement prices.
So a stock that starts off at $ 10 will be bought at $ 7,29 the third time around. The total drop in ahsre value is only 27,1% after a 3x 10% drop.
This in contrast to buying 3x a new equity at their initial price of $ 10. after the third drop one has suffered a 30% drop in value of the already invested money in the previous two rounds. . Plus one does not get the advantage of the leverage on the quantity of shares that one can buy at the reduced share prices from $ 10 to $ 7,29.
So, in comparison with switching stock one is well advised not to switch stocks if the original stock is worth owning at a price of $ 7,29.
