What does Buy the Dip mean? – All You Need to Know

They say being in the stock markets is like gambling because you never know the results for sure. Like a suspense thriller movie, the markets drop and then rise back to once again fall and the cycle goes on. But, are stock market falls bad? Should you enter when the stock market crashes? Seasoned investors would suggest waiting for stock market drops to start buying and realise larger profits once the markets jump back. The current scenario that we are witnessing in the Indian stock markets is tempting many investors to ‘buy the dip’. By buying the dip, many investors ` their stock buy prices or even enter new stocks that may be at their lifetime lows. 

If you are looking to explore the concept of ‘buy the dip’, here’s everything you need to know about it. 

What is ‘buy the dip’?

Buying stocks when their prices at very low or dipping is known as ‘buying the dips’. It is somewhat like purchasing a product when it is on sale or on a discount. When stock markets fall considerably, the prices of most stocks fall down and therefore, these are available at far lower prices than earlier. This also allows investors a wider range of stocks to choose from, as even blue-chip stocks may be available for lower prices.

Buying the dip is ideal for long-term investors as they can enter certain stocks at lower prices and book profits as soon as the market jumps back.

As we are witnessing currently in June 2022, the benchmark index SENSEX is hovering around a 12% discount as against the highs we saw early this year. The selling pressure is triggered by concerns over rising inflation, a rise in the interest rate and continued selling by foreign institutional investors (FII). As the selling spree continues, the market may fall further but offer good opportunities for long-term investors to buy the dip.

Interesting fact

Retail investors have started panicking by looking at factors like foreign institutional investors exiting stocks worth more than Rs. 1.60 lakh crores thus far in 2022. However, if these figures are compared to the inflows of Rs. 25,750 crore in 2021 and Rs 1.70 lakh crore in 2020, investors will not need to take impulse decisions.

Is buying the dip the same as timing the market?

While buying the dip is a stock investment strategy, timing the market is technically not, since one cannot time the market. For example, if the share price of Reliance falls from Rs. 3,100 to Rs. 2,700 per share, we know that the price has dropped but it may not be the lowest level and there can be multiple dips.

If an investor buys the stock at Rs. 2,700 and the price falls further, the new price may be the new low for the stock. Thus, timing the market to make a lump-sum investment can prove costly. On the other hand, if one invests in smaller quantities at every dip, the capital can be saved in the long-term and investors have a better chance of redeeming the investment at good profits. 

Factors to note about buying the dip

Listed here are certain factors to bear in mind while using the ‘buy the dip’ strategy:

1. The strategy is based on the assumption that an investor has surplus cash and has conducted sufficient research about entering at the current price levels. Stock market beginners often get tempted by such scenarios and use leverage to continue buying at dips without considering the available funds. Also, those who are new to fundamental and technical analysis may not be taking the right price decisions and mostly relying on tips from other investors.
2. Stock markets are expected to remain unpredictable and even fall further this year as per analyst reviews. However, to make the most of ‘buying the dip’, investors must know about good quality stocks that they wish to enter. Being prepared with sufficient research will allow investors to enter the stocks at the right prices without missing the opportunity.
3. Even while using this strategy, investors must avoid going all out with the available funds. It is best to buy in tranches as prices decline and aim for a long-term investment.
4. Investors who have limited funds and want to explore this strategy must use SIPs to contain the risk of volatility. Experts predict that corporate earnings will resume their upward trajectory very soon and as liquidity levels rise, investors will start seeing the benefits through stock market returns.

The important point to remember is that to benefit from the stock market rises in the future, investors need to be in the market.

Buying the dip investment strategies

Buying on the dip is essentially a trader’s market-timing technique, basing decisions on share price moves instead of underlying company fundamentals. Still, ordinary investors – even buy-and-hold types – can find it useful, working it into a long-term investing strategy. Here are some tips to buy the dip:

• To use this strategy, you have to analyze the asset to be sure that it is in an uptrend and also have an idea of the normal “dip size” that represents a market correction.
• If you are applying the buy-the-dip strategy to buy stocks, you must use stop losses to safeguard yourself from losing money beyond a point that might affect you financially.
• As Nifty has given technical breakouts on charts, investors can use buy-on-dip strategy.

Conclusion

To conclude, we quote Warren Buffett, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” This is exactly what the current market scenario is teaching us. Instead of receding, investors can explore buying the dips and aim for averaging for long-term capital appreciation. 

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