Should You Buy The Dip? – How Does It Operate and What Does It Mean?

Should You Buy The Dip? – How Does It Operate and What Does It Mean?

Should You Buy The Dip: With the consistent fall of the markets, all of us might have come across the term “Buy the Dip” or “HOLD” if you’re a crypto investor. In fact, a lot of superstar investors made multifold returns by simply buying the dip and selling stocks in the bull run.

Even when the market falls, there is an opportunity to make money from the dip. But what does that mean and why is it important? This article talks about should you buy the dip or not, Let’s keep reading to find out more.

Should You Buy The Dip – What Does it Mean?

By definition, buying the dip means purchasing securities at a discount when the markets are down. When the stock prices drop, it allows investors to buy almost every security at a discounted or undervalued price. Buying the dip has also been linked with timing the market.

 SENSEX and NIFTY have fallen 13.4% YTD this year so far. So if you’re an investor with surplus capital, you can buy into the bear market and purchase large cap stocks trading near their 52-week high. Even strong stocks or fundamentally strong companies suffer from the outcome. 

How Does Buying the Dip work?

The ideal time to buy into the dip of the markets is when a stock is trading very close to its 52-week low or when the markets have fallen significantly due to a market correction or international crisis such as COVID-19 or the Russian-Ukrainian war. Any short-term volatility opens an opportunity to invest at a discount or “buy the dip”. 

The larger the market dip, the more an investor stands to gain from the market recovery. However, investors mostly buy and hold for a long period as markets take time to recover after a crash. They hope the downfall will be short compared to the long-term growth of the stock. 

An Example Of Buying the Dip

Let’s go back in time by two years to 2020, when the market crashed in March and didn’t recover till almost 6 months later. If you had invested in Tata Motors, which had tanked to Rs. 65 per share in April that year, you would have multiplied your investment by five-fold today ( CMP – Rs. 390).

In such circumstances, buying the dip can reward you handsomely. 

Tata Motors Last 5 years performance | Should You Buy The Dip

At the same time, if you invested in Exide Industries at Rs. 147 in 2020, another fundamentally strong stock, then you would have lost money as the stock still hasn’t recovered to its pre-Covid-19 levels (CMP – Rs. 136). 

Exide Industries Last 5 Years Performance | Should You Buy The Dip

Had the stock recovered, you would have doubled your money, at the very least. But that was not the case.  

Risk Management while Buying The Dip

Even an easy-to-learn strategy such as buying the dip should have risk management to cut losses and avoid buying bad stocks. If a stock price falls by a certain price, then investors and traders should implement a stop-loss order to cut losses before it falls lower. So when a share trading at Rs. 100 drops to Rs. 80, then a trader can put a stop-loss at Rs. 70 to cut losses. 

With each dip, the share price could fall lower and lower, so the stop-loss cuts losses early on. When the price enters lower levels, the stock has taken a downtrend and might stay that way for the foreseeable future. 

Learn The Basics Of Stock Market Trading

The concept of buying the dip works for investors who are patient enough for their returns to skyrocket. But that can take anywhere from a few years to a few decades. Buying the dip might seem great because every stock is trading at discount, but there could be solid reasons for a share price to fall.

This could be easily hidden by a market crash when the entire market enters a bear run. But you can surely pick your favorite blue chip stocks for a discount if they were previously too expensive. That’s all for the article on Should you buy the dip or not, hope you liked it.

Check out the link to learn some technical indicators to watch out for. Happy Investing!

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