- Date : 21/10/2022
- Read: 4 mins
Bottom Fishing strategy involves understanding the price trends in the financial market to make profitable investments.
A good strategy is necessary to ensure maximum profits and minimize risks while investing in the financial market. Formulating a strategy requires understanding the financial market and the factors that can impact the price of financial securities. The Bottom fishing strategy is one strategy investors can implement to make gains. Let us understand the Bottom fishing strategy, its advantages, and drawbacks to make an informed decision while implementing it.
What is the Bottom fishing strategy?
Several factors can impact the price of financial securities. These factors can be intrinsic, depending on internal attributes such as the company’s performance, or extrinsic, depending on external attributes such as a natural disaster.
These factors can cause the value of financial security to decline. In some cases, the decline can be justified, but in other cases, it can be a temporary decline. The Bottom fishing strategy involves looking for securities which have been undervalued due to intrinsic or extrinsic factors.
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The security can be undervalued for a certain period due to certain factors but will return to normal once the market settles. As per the Bottom fishing strategy, an investor can purchase the securities during their period of undervaluation and sell them for profits once the value returns to normal. The key to this strategy is to purchase a security at a position when it is about to return to its normal value so that maximum profits can be made.
Consider the example of a security “A”. Supposedly, the price of the security drops even after a good quarterly performance due to a strike at the company’s office. An investor can utilize the Bottom fishing strategy as the security is undervalued. Once the strike is over, the security value will return to normal, providing investors with huge profits.
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What are the benefits and drawbacks of the Bottom fishing strategy?
The bottom fishing strategy requires the investor to be up to date with news from the financial market, as any dip in the price of a stock can be a Bottom fishing opportunity. Just like any strategy in the financial market Bottom fishing strategy has both benefits and drawbacks:
Bottom fishing provides an opportunity to make huge profits within a short period. As the value of the security returns to normal, the profits can be made faster than other forms of investment.
Bottom fishing can incorporate technical methods allowing the investor to understand which stocks are undervalued without any change in their actual value.
The risk is high as the price of the security is already dipping. If the strategy is incorrectly implemented, it can result in huge losses for the investor.
The value of the security can take longer to return to its original position than expected. This can make it difficult for investors to understand when to sell and when to hold.
Bottom Fishing Strategy: Techniques
The bottom fishing strategy can be implemented in the financial market by utilizing two different techniques:
- Fundamental Analysis - This form of the analysis incorporates observing that the price of a security is falling without any reason behind the decline. It involves looking at multiple securities in the market and analyzing which of them are usually valued at a good price but have been undervalued without cause.
- Technical Analysis - This form of analysis involves keeping an eye on the Relative strength indicator level of securities. If certain security is being sold at high volumes without any because it can be an opportunity for the Bottom fishing strategy.
The bottom fishing strategy involves a certain risk, but with this risk comes an opportunity to make huge profits. An investor must be clear about the different techniques to implement this strategy before utilizing it in the financial market. Utilizing the correct technique for the Bottom fishing strategy and the latest market data can produce good results for the investor. Understanding and execution are the essential components of a strategy’s success.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.