Buy The Dip: What does it mean & How it works?
Created on 16 May 2022
Wraps up in 5 Min
Read by 3.9k people
Updated on 09 Sep 2022
Are you one of those who keep on buying the dip until the stock price becomes zero? 🤭 I think yes.
But you are in the right place to know what buy the dip actually is.
While the stock market is all “Kabhi Khushi Kabhi Gum”, a dip in stock prices can bring either “Gum” or “Khushi” among investors. If you are someone who is feeling the “Khushi” seeing the recent market dip, you might be in a mood to dive in and buy on the dip. The stock market has fallen by more than 12 per cent over the last three months.
I am sure some of you might be all cheers to average your share buy price by buying the same at a lower price. Or, the stock you have been eying on for months has finally come within your reach now. Either is the case; you have your reason to be excited.
Are you one of such investors who believe in investing in a stock market dip? Today we will discuss stock market dips, what they mean, and things you should be careful about while investing in them.
What is a stock market dip?
Consider a stock price at a higher level that is away from its 52 week low. Now imagine if the price of this stock decreases considerably from that level. This is called a stock market dip. Usually, a dip in the market occurs for a concise term.
The stock market is considered to be volatile in the short run. However, in the long run, it has historically moved north. Therefore, buying the dip is an idea looked forward to by long term value investors.
Let us discuss the meaning of buying the dip.
What does buy the dip mean?
Buying equities on a dip or at a lower price can be similar to purchasing a product on sale. Yes, it is just like a regular sale, where you can get the item of your choice at a discount.
Also, since almost every share has gone down and is available at a lower price than before, you can have more options. Even the bluechip stocks are available at a lower price.
Thus, long-term investors can chip in on this opportunity. They can enter the market and book early profits whenever the market bounces back to its earlier level.
Just like it has happened now, the benchmark index SENSEX is at more than a 12 per cent discount, and there’s already a selling spree hovering over the market. This is the fall where long-term investors who buy the dip enter the market.
But then, is it possible to time the market?
You cannot time the market
One of the most prominent mistakes stock market investors make is timing the market. You know about the stock market dip, but you cannot be sure that this is the lowest the prices can get.
For instance, if a stock ABC’s price falls from Rs.310 per share to Rs.276 per share, you know that the price has dropped considerably, but you can’t be sure if this is the lowest the price will go.
Suppose you buy the same stock at Rs.276, and the price slides down further and touches Rs.230 the next day, then that will be the new low.
One of the recent examples of a stock creating a series of new lows is Zomato. Within six months, the stock has shown a gradual and considerable fall.
Like a falling comet, its value has declined from Rs.156 to less than Rs.54 in the past six months. It is tough to ensure that you are buying at the lowest or near the lowest price. Investors might have purchased the stock at every dip because you never know when the market will bounce back.
So, these instances make it difficult for investors who are eying for short-term profit booking.
Uncertainty around short-term profit-booking opportunities
Like everything in the stock market, the moment when the market will bounce back is uncertain to determine.
Let us understand with the help of the current scenario. The market tumbled and has been witnessing the dip for more than thirty days now. This is mainly due to the contagion effect of the ongoing war between Ukraine and Russia.
However, no one can be certain when the war and its impact on trade and the economy will end. Also, there are chances of a new covid wave coming in, the rise in bank rates and more that have impacted the stock market.
Therefore, it might be long before the selling spree in the market converts into positive sentiment. Those eyeing short term profit booking might have to wait for long before they get this opportunity. This makes buying the dip riskier.
So, how can you know about the near future stock market sentiment?
Keeping the VIX handy
You can gauge the near term stock market sentiment with the help of the Volatility Index, also known as VIX. WITH THE CURRENT STOCK MARKET DIP, the VIX figures have gone from 25 to 35 over the last week. This can indicate that more volatility is expected in the market shortly.
Thus, keeping this VIX handy might help you be prepared for future volatility.
But that will help the short-term stock market investors. Is there any such tool for the long term investors putting money in the market during dips?
Long-term investors can stay put.
For a long-term investor, buying the dip can be an opportunity to average out their previously purchased shares.
Since they are not looking for short-term profit booking, they can stay relaxed and wait for the market to bounce back to normal.
Buy the dip can work for investors willing to take bold bets on their previously purchased stocks. They can buy the lows and average out their stock buy price.
Similarly, it can be an opportunity for new investors to enter the market. Since the prices of even the bluechip stocks fall during a stock market dip, it can be an excellent opportunity to pick your favourite ones that seemed out of your pocket’s reach earlier.
In either case, the investors shouldn’t panic and can benefit if they stay invested for a longer-term.
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