What is buying the dip?

4 min Read Sep 20, 2023

Have you heard any celebrity investor or a renowned market expert proclaiming to buy the dip? Buy low sell high, buy the dip, sell on rallies—all these pieces of suggestions, no matter which corner of the market they come from, point at one thing—taking advantage of price volatility.

When investors search for the best stocks to buy during a market crash, they actually look to buy the dip.

Things you should know before you buy the dip

The entire thesis of buying the dip relies on two principles:

Stock prices have come off temporarily and largely on account of an overreaction of the market
Prices may rebound sharply when the bout of selling gets over

In short, you should be reasonably sure that the fundamentals of a company—i.e. factors affecting the underlying business of a company—have not weakened and that investors at large are going to realise this.

It is important to note that for technical analysts, the interpretation of 'buy the dip' might be slightly different. They may not even look at the company's financials and consider nothing but its chart structure and trend analysis.

Also read: Fundamental analysis Vs technical analysis

The benefits of buying the dip may include:
✔️ An opportunity to benefit from the stock market fluctuations

✔️ Help in averaging-out your buying price

✔️ Accumulation of more shares of the same company

✔️ Efficient use of your capital in the long run

However, when buying the dip avoid
× Wrong assessment of price declines
× Buying without evaluating the contrary factors
× Averaging the stock beyond a threshold
× Expectations for an early price recovery

Let’s take a couple of examples to better understand when buying the dip may and may not work.

Buying the dip doesn’t help always…

(Note: The chart is for illustration purposes only and shouldn’t be construed as a recommendation to buy, hold or sell. The past performance isn’t indicative of future trends.)

When Reliance Infrastructure started its downfall in 2013, many investors got tempted to buy the stock on dips. Then, the company was involved in some prestigious infra projects which were critical for India’s overall infrastructure development. However, the debt pile of the company increased from Rs 21,976 crore in FY13 to Rs 30,550 crore by FY16. Meanwhile, the company’s net profit dwindled from Rs 2,247 crore in FY13 to just Rs 760 crore in FY16.

The company continued to pay dividends all these years but posted a big loss of Rs 2,426 crore in FY19. Whoever bought the stock on dips between 2013 and 2016 received a rude shock during the subsequent times.

Buying the dip can help if the fundamentals are improving

(Note: The chart is for illustration purposes only and shouldn’t be construed as a recommendation to buy, hold or sell. The past performance isn’t indicative of future trends.)

On the other hand, SBI—the largest bank in India—emerged stronger from covid-shocks and also managed to put aside the overhang of bad debts. It raised capital during the pandemic and continued to post a steady recovery in earnings. Its performance improved quarter after quarter. Buying the dip has proved to be a profitable strategy between February 2021 and December 2022 on this count.

In summary

Buying the dip is an attractive strategy as it can help you take advantage of price volatility—to buy low and sell high. However, what to buy on dips and what to "give a miss" is a crucial call. To take well-informed decisions, ensure to understand the fundamentals of companies and their technical charts/trends.

Are you buying anything on dips right now? Do let us know in the comments.

Also read: Trend analysis and how you can go about it

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made there shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you consult your financial advisor before taking any decision pertaining to your finances.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to the blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in the securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.