What to Know Before You Buy Stocks on the Dip

June 15, 2020
431 Views

After signs of recovery earlier in the month, volatility struck the stock market last week. High unemployment, negative GDP growth, and the threat of a second wave of Coronavirus lead to widespread selling and tumbling stock prices. The market went from one of its biggest-ever highs to one of its swiftest fallbacks.

While volatility creates stress for investors, there are opportunities to be found. Buying on the dip is an effective strategy to maximize gains, as long as a few important points are kept in mind.

Buy as Close to the Bottom as Possible

There’s no way to predict stock movement with certainty, but it’s often possible to gain an idea of which way the market is moving.

  • A stock’s 52-week low will show the low end of confidence in the recent market. Comparing today to the conditions of the 52-week low can offer insights into market sentiment.
  • Read as many analyst predictions as possible. Analysts don’t always get their predictions right. Evaluating several reports will create a broad overview of the strength and price range of any particular stock.
  • Many investors buy as soon as momentum shifts. If a stock appears to have bottomed but then displays consistent growth for more than a day, it could be the perfect time to buy while the price is still low.

Look for Fundamental Strength for Swift Recoveries

The stock market is cyclical. However, not every stock will recover. It’s important to look for fundamental strength in any stock that is purchased on the dip.

  • Large-cap stocks from well-established businesses are usually the first to recover when market sentiment changes. Examples in today’s market include companies like Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL).
  • Stocks in strong industries are more likely to recover. An example today is the grocery retail industry, where retailers and suppliers have seen high demand throughout the health crisis. Grocery Outlet Holding Corp. (NASDAQ: GO) is an excellent case study, with high earnings growth expected this year.

The inherent strength of a company is just as important as the raw market numbers and trends.

Buying on the Dip is a Viable Strategy

Buying when a stock is low offers plenty of room for growth. Sometimes, the low points of the market represent the best opportunities.

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