Money What Does it Mean to Buy the Dips?

19:24  12 january  2018
19:24  12 january  2018 Source:

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But what does that mean ? Buying on the dip essentially means making a purchase of a stock, fund, or some other security after the share price has dropped in value. The drop in price can be caused by some event that affected the company or fund directly

What does it mean to " buy the dip "? " Buy the dip " means pretty much exactly as it sounds. If you " buy the dip ", this means that you are planning on using weakness in a stock (or any asset for that matter) to lower your average price in a position.

  What Does it Mean to Buy the Dips? © Provided by Fool

If you’ve been investing for some time, you’ve probably heard of people saying you should buy the dips. How much of a dip should you buy? A dip of 3%, 5%, 10%, 20%, or 50%?

Quotes in the article

Cineplex Inc


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Cineplex Inc. (TSX:CGX) is used as an example to discuss buying the dip . If you’ve been investing for some time, you’ve probably heard of people saying you should buy the dips .

Buy on dips is when you are purchasing a financial instrument at the current lowest low. Sell into rallies can be done in two ways - If a financial instrument rises fast most of the time there is a Buying on a dip means to wait for the rate to make a sudden fall that is out-of-line with its longer trend, and buy it .

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It depends on a lot of things. The company in question should be fundamentally sound. That is, you should have determined that it’s a quality company to invest in.

Moreover, depending on the type of industry the company is in, investors might require a bigger or smaller dip from the stock. It’s normal for stocks to move up or down as much as 3% on a given day. When it’s earnings season, stock prices can be even more volatile.

Most importantly, investors should consider the valuation of the company. If a stock is overvalued, and it had bad results in a quarter or multiple quarters, the stock will be hit hard.

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A plan to buy the dips also requires that the investor knows when to sell. A bargain purchase price will not often do an investor much good unless he or she has a plan for what’s called profit-taking.

Buy the dips means "I don't need my money, please take it from me." I'd say I've probably done a poor job with the IRA's (need to quit) as I have tried to wait for larger dips (5-10%) that have never come, or come and go so fast that I

An example

Take a look at Cineplex Inc. (TSX:CGX). The stock is nearly 35% lower than it was a year ago. In 2013 to 2017, the stock was trading at high multiples, but it wasn’t growing at a high pace. Perhaps buyers at the time felt they were paying up for quality. However, with the correction that the stock has had, it indicates that growth rates are important, too.

Going forward, Cineplex’s growth can improve. The company is investing away from the movie theatre business, in which it has a leading position in Canada. If its investments in The Rec Room, Playdium, and Topgolf pay off, the company could experience higher growth.

Can Cineplex stock dip further from current levels? Sure, it can. A part of what affects dips or corrections is psychology. Since the stock has been dragged down so much lately, the negative sentiment can continue to weigh on the stock. Cineplex needs to show results before the stock can turn around.

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Meaning of Dips . What does Dips mean ? We're buying the dips and when it reaches new highs we take a little bit of profit, but not too much.

Instead, it turns out the buy - the - dip strategy would earn a third of return of a buy -and-hold strategy with much higher volatility. The second reason has to do with market momentum: “The market tended to exhibit momentum more than mean reversion over yearslong horizons,” Lee wrote.

The fact is, the stock is more attractive than it was a year ago after the correction. And it’s a decent place to start building a position at a ~5% yield if you have an investment horizon of at least three years.

Investor takeaway

The idea of buying the dips is that you buy a stock when it has declined so much that you find it attractive and believe it will recover to higher levels.

What’s more important than buying the dips is to question the growth prospects of a quality company and determine if it’s priced at a good valuation.

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Fool contributor Kay Ng owns shares of Cineplex.

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