All about buying the dip

Introduction

The stock market is all about how long and where you have invested in the market. The profit you make from the market depends entirely on these two parameters. However, you may increase your profit by buying at a low price whenever the market gives opportunity. A good 'buying the dip' strategy is helpful to a great extent in such situations.

Buying the dip meaning

Buying the dip is a stock or index purchasing strategy, which is used when the value of a specific stock or index falls significantly. When the price of a quality stock falls, you have the option of buying it at a discount and increasing the average profit of your investment portfolio when the share prices return to their previous levels.

Many experts recommend using this strategy when there is a short-term price movement. For example, assume you want to invest in a company that is consistently doing good. Due to some operational issues, the company has posted poor quarterly results, leading to a significant fall in its stock price. In such a case, there is a good chance that the fall in the company's share price is temporary. This could be the right time to take advantage of the buy-on-the-dip strategy.

Which stocks should you invest in using the buy-on-the-dip strategy?

The buying the dip strategy should be used on quality stocks of any industry. However, one should avoid cyclical stocks as bear cycle could be long. It is better to buy cyclical stocks when the cycle start turning up.

Perks of buying the dip

1. Opportunity to pick quality stock in ‘Sale’

The stock market is volatile. It is always in the middle of a bull or bear trend. If there is any good news in the market, the share price will rise, giving you a good profit. However, if any government policy or global event does not go well with the market, the bear takes control, allowing you to buy more high-quality stocks at lower prices. It would help if you took the opportunity to buy some quality stuff on every dip.

2. Cost averaging

When the share prices fall, opting for a buy-on-the-dip strategy can lower the average cost of your stock holdings in a specific company. It also helps to increase your potential returns if the share price rises unexpectedly in the future.

Drawbacks of buying the dip

1. Volatility

Volatility is an inherent part of the stock market that you can’t get rid of if you want to invest. Due to volatility, it is difficult to predict that this dip is the right time to purchase and the market will not fall further. You should always buy in small quantities on a dip and try to dig out the reason for a fall in the market.

2. Past performance isn’t always reliable 

Many investors believe that history repeats itself. However, this may not always be the case with stocks. If a stock hit an all-time low years ago and bounced back to previous levels within months, there is no guarantee that this scenario will repeat itself. There is a possibility that the same stock will fall again and never recover.

3. Reason for a dip is crucial

Unjustified dips can help you make large profits. However, what if the reason for the drop is the company’s poor financial performance? If a company’s share price is falling due to poor performance which is likely to get worse, there is very little chance that it will rise again in the future.

Who should prefer buying the dip?

1. You can take risk

Buying the dip strategy entails some risk. What if the specific share price does not reach its previous high? You will lose money. Also, it is possible that after your purchase, stocks fall further and it may take a long time to recover. It would be best if you kept these things in mind before taking any decision.

2. You are good at analysis

Stock trading and investing involve numerous technicalities. Dip buying is the best option if you have in-depth knowledge of various technical indicators and can decode the company’s financials by simply looking at the ratios.

To conclude

Buying the dip meaning is different for each investor. Some see it as a money-making opportunity, while others see it as a risky affair. It is advisable to consider the various fundamental aspects of the stock and thoroughly evaluate the risk parameters before going with this option.

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