Buy the dip is a common phrase used by investors, TV journalists and traders which means purchasing stocks after they have dropped in price. It follows the basic investment principle of “buy low, sell high”.
When an investor or trader is buying the dips it means they are purchasing a stock after a drop hoping to profit if the market rebounds.
When the market is in a long term uptrend, buying the dip helps as many stocks will experience short term price decline before going up again. These traders and investors hope the uptrend will resume after the drop.
If an investor is already long on a stock and buys on the dips, it means they are averaging down. It means they are buying additional shares after the price has dropped further from their earlier buying price, resulting in a lower net average price.
Value investors prefer to average the cost of owning a position by buying the dips.
However, in a downtrend, it’s unprofitable as you never know how far the stock price will decline. Buying the dip in a bear market could be a recipe for disaster.
Remember, buying the dip does not guarantee getting in at rock-bottom prices.
Most investors say they intend to buy low and sell high, but many of them end up buying high and selling low instead.
