Buying the dips is investor slang for buying a stock that has dipped in price, in hopes that the decline will soon reverse. An investor that buys dips believes that the stock is temporarily undervalued and that they are getting valuable shares for s discounted price. For instance, after the announcement of Brexit in June 2016, many investors bought stock in major tech companies during a dip in the overall market based on the assumption that sell-offs were irrational and that the market would soon recover.
Two concepts related to buying dips are reversion to the mean and market sentiment. Mean reversion theory states that a stock is likely to move back to its historical average price over time. Market sentiment refers to the idea that the prices are sometimes irrationally driven to extremes before returning to the average price.
Buying dips only works if the stock in undervalued by the market and the dip is not the result of fundamentals such as lack of revenue generation. When you buy a dip, you always take a risk that the stock will continue to decline rather than recover in a profitable fashion. It is also tricky timing when to sell the stock during a reversal.
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