Buying the dip – what you need to know

There are a few things that, at the moment, may strike you as unwise to even contemplate: international travel, moving house or investing in global stock markets.

With two of these, you could be right, especially under government guidelines, but there are no restrictions on investing, and now might be a good time to buy.

When people look at stock markets in the news – showing dramatically downward-pointing charts and stressed-looking traders – many assume it would be madness to invest right now. However, with long-term investment there’s actually a strong case for doing so.

It’s called ‘buying the dip’ and essentially refers to investing in stocks after they have suffered a sharp drop. Here are just some reasons why it can work as a strategy for long-term investors.

Take advantage of price discounts
Remember that just because a share price falls doesn’t mean the inherent value of that company has suffered to the same extent. The main reason stock markets are falling is because people are panicking, so investors are moving money to protect it while they can. And even though in some sectors the virus means fundamental challenges to how businesses operate (for example, airlines and restaurants), others might be less impacted and well-positioned for future growth. Being able to buy good companies at a lower price means forward-thinking investors could access this future growth from a discounted position.

Recovery rallies
Stock markets have fallen but there have also been big rises, as investors respond to good news and the panic begins to fade. For instance, after the US Senate signed off on a $2trn coronavirus response package, the FTSE 100 – which had lost significant value in the preceding weeks – experienced its biggest one-day surge since 2008 (by over 9%). Knowing when a market will rally is impossible, and further losses could of course still happen, but investors buying into the dip will be in the best place to benefit from recoveries if and when they happen.

Better placed for long-term
Markets move in cycles, going up and down, and investors spend a lot of time deciding when’s best to get involved. For instance, in 2019, US equities celebrated the longest bull run in history, which would have appeared attractive to investors. However, the coronavirus pandemic was only a few months away and has since wiped billions off major US indexes. It’s impossible to know what’s around the corner but buying into these dips could be as good as time as any for investors to position themselves for long-term upward trends.

Your capital is at risk. 

This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without having regard to any particular investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilising publicly-available information.