If you invest in stocks, you must have heard of the term ‘buying the dip’. So, what does buying the dip mean? Buying the dip closely follows the investment principle of buying high and selling high. In other words, it means buying a stock when its price drops, which allows you to make more money from your investments.
Now that you know buy the dip meaning, you must have understood that it is akin to timing the market. Here you try to predict how stock prices will move in the future and make buying and selling decisions accordingly. Buy the dip strategy is in contrast with buy and hold, where you hold on to your investments for the long term.
A dip in stock market happens when stock prices decline from their highs. There can be multiple reasons for a dip in stock market. For example, when Covid was declared a pandemic by the World Health Organization (WHO) in March 2020, markets tumbled, and prices of individual stocks came down.
Similarly, in 2008 when one of the world’s largest financial institutions was in trouble, stock prices crashed. The recent dip in stock market is a result of the central banks of the western world making it clear that they will hike interest rates. War between two European nations and a hike in oil prices has made things uncertain, resulting in a dip in share market.
Buying the dip meaning is explained above. It is an investing strategy where you buy a stock after its price declines. You assume that prices will go up in the future, thus making gains. If you closely look at a stock chart, you will find that lines moving up or down are relatively flat.
However, those flat lines are relatively flat, and if you can purchase stocks with an upward trajectory after a temporary price decline, you can reap higher profits.
If you want to follow buy the dip strategy, look for sectors that are hit hardest during sell-offs. Finding sectors with considerable price declines and analyzing stocks, mutual funds, or exchange-traded funds tracking them can showcase some light on the opportunities available to buy.
The Covid-induced pandemic brought down the share prices of several bluechip companies that otherwise provided stable returns. However, it was a blessing in disguise as it allowed investors to lap up their stocks at attractive valuations. Some of these stocks are yet to recover and attain the valuation before the pandemic.
If you have a stable job and a sustained cash flow, you can contemplate increasing the investment amount for buying the dip. You can temporarily direct funds for other goals towards investing in stock markets and buying shares available at low prices. However, before you do so, make sure you have covered all bases.
Instead of investing a large sum of money at one go, invest in a staggered manner. Known as rupee-cost averaging or dollar-cost averaging, this strategy allows you to purchase shares throughout the dip. It also averages out the buying cost with time and reduces volatility.
If you can get timing the market right, you can buy in dip. That said, even the most seasoned investor can’t predict when prices will come down and go up. Therefore, time in the market is more essential than timing the market.
You shouldn’t buy a stock just because its price has fallen. You must adopt a rational approach and analyze a stock’s fundamentals before putting your money. A fundamentally robust stock will always be a winning one, irrespective of markets. Start with a simple valuation metric known as price-to-earnings (P/E) ratio to gauge a company’s performance.
The success of buying the dip investing strategy depends a great deal on predicting future price movements. This ploy can work exceptionally well if you can time the market well. However, as said, it’s complicated for anyone to time the market and accurately forecast its movement. In most cases, a long-term investing approach can do the job for you.
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