Bottom fishing is one of several techniques implemented in the stock market that involve buying stocks when they are at their most condensed or discounted levels. However, this does not involve simply buying any falling stock. A true bottom-fisher selects fundamentally good properties that have seen brief consolidation due to environmental conditions rather than individual conditions.
It is a high-risk approach employed with the hope of making rapid, short-term profits; At the time of investing, technical and fundamental indicators may or may not fully support this. Bottom fishing is primarily justified by the assumption that the price of the security is undervalued and a short-term price reversal is anticipated.
What are the benefits of bottom fishing?
It provides big payoff in less time. In the event that the security turns upside down, the return potential is higher and faster than with a regular investment.
This may be supported by technical configurations in which an asset is considered oversold over multiple time frames, resulting in a vigorous selloff without a corresponding change in its economic fundamentals and business prospects.
What are the disadvantages of bottom fishing?
Although bottom fishing is considered as a short-term profit generating technique, it is sometimes observed that it takes longer than normal investment to recover such securities, which achieves the goal of this strategy. prevents doing.
It is a high-risk technique as opposed to the momentum investing approach and is not suitable for all types of investors.
Should new investors embrace this technology?
If you are a new investor who has recently started investing in stocks, it is advisable to wait for the bear market and not risk losing money. Before getting into bottom fishing, you should understand a bear market. For example, bear markets can deplete your portfolio, and stocks you currently undervalue may turn out to be really cheap in the future.
A bear market can last for several months, therefore, it is prudent to wait a few months before engaging in bottom fishing as the market can be quite turbulent. It will be beneficial if you have the money to engage in bottom fishing and buy high quality equities whenever the market experiences a major correction.
Bottom fishing can sometimes be a dangerous strategy because it is difficult to tell if a stock has corrected enough and is ready to recover. It is important to take into account factors such as the global environment, asset fundamentals, debt, management of the firm and its future goals. And of course, don’t “put all your eggs in one basket,” as Warren Buffett advises investors.
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