Buy the dip: What does it really mean in trading?

A correction in the index or a fall in the share price of a fundamentally good stock may be classified as a dip. Buying the dip may give good returns to investors in the long run.

Buy the dip What does it really mean in trading

Whenever a fundamentally good stock or the index is trading at high levels (higher than its historical levels), we wait for the share price or index to fall before buying it. The fall, whenever it happens, may be classified as a dip. Dips in fundamentally good stocks or indices represent good buying opportunities for investors as they may earn handsome returns in the long run. 
In this article, we will understand how investors can benefit from buying a dip in the share price of a good company or the broad index.
Benefiting from buying the stock price dip
With the example of the Bharti Airtel share price movement in the last five years, let us understand how buying the dip at various points was an opportunity to earn good profits.

Bharti Airtel 5-year price chart
 

Bharti Airtel

(Source: https://www.moneycontrol.com)

As can be seen from the above chart, the Bharti Airtel share price hasexperienced a lot of volatility in the last five years. This share price volatility is a result of some factors such as:

a) The Supreme Court ruling against the telecom companies on the Adjusted Gross Revenue (AGR) case
b) The high debt burden of Bharti Airtel
c) Rock bottom prices of telecom services due to competition from Reliance Jio, etc.

Bharti Airtel is India’s leading telecom company. So, in spite of all the above factors leading to a lot of share price volatility, every dip in the Bharti Airtel share price presented a good buying opportunity. Let us understand how you would have earned handsome profits if you bought any dip, by looking at the above chart. Look at the sequence of all major dips in the share price in the last five years, from 2017 onwards:
 

major dips in the share price in the last five years

We just saw how the Bharti Airtel share price dips presented investors with six buying opportunities in the last five years. As an investor, if you bought during a dip, you would have made handsome gains in the next phase of the up move. If you bought any of the above six dips and are still holding the stock today (August 2021), you would still be sitting on handsome gains as the stock is trading at lifetime highs.

Related: Why you need to know about NAV if you are a regular investor?

Check the strengths of the company before buying the dip

As an investor, you should note that the share prices of many companies dip from time to time. But, the share price of every company will not bounce back as in the case of Bharti Airtel. Bharti Airtel is the market leader in telecom services and has managed to survive every adverse situation so far. But, for every strong company like Bharti Airtel, there are other telecom companies like Reliance Communications (Rcom), Tata Teleservices, MTNL, etc., that have not been able to survive. Investors who bought the shares of these companies during the dip had to face losses.

Sometimes, even the leaders are not able to survive. Some examples include Suzlon Energy (leader in wind energy services) and Unitech (India’s second-largest real estate company at one point in time). So, evaluate the company’s strengths and be mindful before buying the dip in share prices. 
While you may not be sure of which company’s share price dip to buy, you can play it safe by buying a broad index like NIFTY 50 whenever it corrects. Let us look at this more closely.

Benefiting from buying the NIFTY 50 Index dip

We saw how buying the dip for a fundamentally good stock like Bharti Airtel can be rewarding when the stock bounces back. Similarly, you can buy the dip for a broad index like the NIFTY 50 by buying units of a NIFTY 50 index mutual fund. Based on past data, whenever the NIFTY 50 Index has fallen, over time, it has recovered all the losses from the fall and went on to scale new highs.

15-year NIFTY 50 Index movement
 

15 year NIFTY 50 Index movement

(Source: https://in.tradingview.com/symbols/NSE-NIFTY/)

During the 15 years from 2007-2021, the NIFTY 50 Index has gone through many phases of down moves and up moves. The chart shows how the NIFTY 50 Index has not just managed to recoup all the losses from every previous dip but went on to make new highs. As of August 2021, the NIFTY 50 Index is trading at an all-time high of around 16,500.

Related: Tomorrow Makers’ Comprehensive eBook on Intraday Trading

Let us look at some of the NIFTY 50 Index dips during these 15 years and how an investor would have benefited had they bought the dip.
 

50 Index dips during these 15 years

Related: Stock options trading: What every stock investor should know about?

Last words

In the long run, buying the dip in the case of a fundamentally good stock or a diversified index is always beneficial for investors. In the above two scenarios of stock (Airtel) and index (NIFTY 50), we saw how investors who bought the dip would have made handsome gains. The only challenge for investors in buying the dip is to know when the stock or index has bottomed out and will turn around. 

Identifying the bottom point is a challenge even for knowledgeable investors. In such cases, you may define a parameter for buying the dip. This can be, say, a 10% correction at the index level or a 15%-20% fall in the share price of an index. Also, it is a good idea to invest your money in small tranches rather than investing the entire amount in one go.

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