‘Just buy the dip’, is a general piece of advice you might get while investing. As a rookie investor, this term might confuse you further. Read on to find what this means and make investing less daunting.
What does ‘buy the dip’ mean?
In layman’s terms, buying the dip refers to buying stocks when the market price drops down. This way, you get hold of the stocks when the price is low and can make profits when the market takes off. In general, this is a sure-shot way to ensure large profits from small investments.
Buying the dips is in contrast to another famous piece of advice where you buy investments and hold on to them for a long time. In buy-and-hold investing, you will have to wait on the stocks to grow your portfolio.
What skills do you need?
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Some might say that investing in stocks needs luck. But, that’s a very small aspect. Predicting the market is what will help you grow as an investor. When buying the dip, this skill will help you make wise decisions on what stocks to buy and sell. Remember that timing the market is a risky and difficult feat. It might not work all the time so, invest small and build up based on that.
How to manage and reduce risks?
Buying the dip is a double-edged sword. If you time it correctly, you can make a lot of money. But, the timing is difficult to predict and can result in you losing a lot of money. Hence, it is encouraged for traders to buy hot stocks at dips as fluctuations are popular in bull markets.
“When buying the dip on individual stocks, it is important to identify the reason for the dip,” said Andrew Wang, the managing partner of Runnymede Capital Management. “Is a stock down because of a broader down move in the overall market, or is it unique to the company? Further, when buying the dip, it is important to focus on stocks having positive fundamentals and good value. The biggest risk of buying the dip is entering a stock that will continue to go down further. You want to avoid the worst-case scenario of trying to buy the dip of a company that’s on its way to bankruptcy.” he added.
Alternatively, if you are a long-term investor, you should consider dollar-cost investments. With this, you can regularly invest a little bit every month for a long time and face less risk. This way, market fluctuations are less likely to affect you, all while you build your portfolio!
The take-home message is that buying the dip is a great investment strategy if you’re able to predict the market or make wise choices. If you are confident in your ability and have a keen eye, this is the way for you.