Why “buy after a drop” isn’t always a strategy?
The stock fell by 30%.
The first thought might be:
“It's already dropped a lot—now it should recover.”
But this is exactly the trap.
A stock price decline by itself doesn’t mean the stock has become cheap. The reason for the drop may not have disappeared anywhere:
the company’s guidance worsened;
profits or revenue turned out weaker;
debts increased;
industry prospects changed;
the market revised its valuation of the company.
For example, a stock fell from $100 to $70.
That’s −30%.
But if after that the company’s prospects keep deteriorating, the price can fall even lower—for example, to $50.
So the question:
“How much has it already fallen?”
is not always the most important.
More important is:
“Why did it fall, and did anything change inside the company itself?”
A drop can create an opportunity, but the mere fact of the drop is not a buy signal.
#Stocks #Investing
The stock fell by 30%.
The first thought might be:
“It's already dropped a lot—now it should recover.”
But this is exactly the trap.
A stock price decline by itself doesn’t mean the stock has become cheap. The reason for the drop may not have disappeared anywhere:
the company’s guidance worsened;
profits or revenue turned out weaker;
debts increased;
industry prospects changed;
the market revised its valuation of the company.
For example, a stock fell from $100 to $70.
That’s −30%.
But if after that the company’s prospects keep deteriorating, the price can fall even lower—for example, to $50.
So the question:
“How much has it already fallen?”
is not always the most important.
More important is:
“Why did it fall, and did anything change inside the company itself?”
A drop can create an opportunity, but the mere fact of the drop is not a buy signal.
#Stocks #Investing
