Understanding "Buy The Dip"

What is buying the dip?

In the stock market, share prices regularly fluctuate. This doesn’t affect the amount of shares you own but instead the value of the shares. Usually when these fluctuations happen, depending on the reason, share prices may drastically drop, resulting to an opportunity to “buy the dip”.

Why Buy the Dip?
Buying the dip allows investors to lower their average purchase price for a stock, enhancing potential long-term gains. Here’s how it works:

For example:

• You initially buy 200 shares at R1 per share.
• The share price drops to 50c per share, and you buy another 500 shares.

• Formula: (200 shares × R1) + (500 shares × R0.50) = R450
• Total cost of holding (R450) / Total number of shares (700) = R0.64 per share

The more shares you purchase relative to your initial holding, the closer your average purchase price moves to the lower price.

Is a Dip in Share Price Always a Bad Thing?

1. Share Dilution:
   Occurs when a company issues additional shares, reducing the value of existing shares. Often done to raise capital for growth or operations.
   
   
2. Sell-Offs:
   Large-scale selling can cause share prices to dip temporarily. Supply exceeding demand often leads to price drops.
   
   
3. Market Sentiment:
   Broader economic fears or industry-wide concerns can trigger dips unrelated to a company’s fundamentals.
   
   
4. Short-Term Disruptions:
   Earnings misses, regulatory changes, or geopolitical events can create temporary price dips.