Buying the dip: What is it and should you do it?

‘Buying the dip’ means investing in a company when it drops in value due to wider concerns within the market, rather than investors jumping ship from said company due to performance concerns over the long run.

For example, at the beginning of 2020 when the pandemic was beginning to rear its ugly head, there was a significant down-trend in global markets. Investors were pulling out their cash, fearful of what the market (as well as the world) was going to look like in the future.

Uncertainty rocks the stock market.

In that sort of a situation, the main reason for falls in stock market prices was because of consumer sentiment, as opposed to concerns about individual companies. That’s an example of the sorts of conditions where buying the dip may be fruitful. 

The aim of buying the dip is to invest in stocks at a cheaper price than was previously on offer, in hopes of capitalising when the market eventually bounces back.

However, this sort of investment strategy isn’t without its risks.

You may have heard of investors talking about ‘timing the dip’ – in particular, how difficult it is. Timing the dip is basically an attempt to guess when the drop in market’s value will reach the bottom, before consumer sentiment changes and people rush back to reinvest.

It’s widely considered impossible to time the market, waiting for it to bottom out.

Sure, you can get lucky and be among the first to invest back into a company post-fall, but you might have just contributed to a ‘dead cat bounce’, meaning a slight up-trend in the market, before falling back down to pre-bounce values when more people jettison their positions.

There’s also the risk that what you believed to be the bottom of the dip was actually more of a shelf, from which the price plummets even further. That’s why it’s important to never invest more than you can afford to lose.

Instead of trying to predict future price movements, using an investment strategy like dollar-cost averaging could prove to be a safer alternative for long-term investors.

Dollar-cost averaging involves periodically investing the same amount of money in an asset, no matter what the price is, over an extended period of time.

The theory goes that when you buy, regardless of whether the market is up or down, you’ll be able to eventually reduce the average cost of the shares you’ve bought.

Since the amount of shares you can buy with a fixed sum of money is lower when the price is high, dollar cost averaging lets you buy more shares when they’re cheap and fewer shares when they’re expensive.

By using a strategy like dollar-cost-averaging, you can take advantage of the dips somewhat, without the risk of trying to guess where the bottom is and injecting a lump-sum of your cash into a volatile market.

If you’re new to the share trading world, or just need to brush up on some share trading terms and definitions, then head over to our share trading guide for absolute beginners, where you’ll get an overview of everything from the basics of trading, to opening an account.

Already investing? Compare share trading platforms with Mozo to see if you’re spending too much on monthly fees and brokerage, or check out which accounts the Mozo experts selected as the best share trading platforms in 2022.