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What exactly is this bottom fishing strategy? MintGenie explains

FILE - A Wall Street sign hangs in front of the New York Stock Exchange in New York, on June 14, 2022. Stocks are opening broadly lower on Thursday, July 14, 2022, on Wall Street after another hot reading on inflation, this time for wholesale prices, has investors bracing for another big interest rate hike from the Federal Reserve later this month. (AP Photo/Seth Wenig, File) (AP)Premium
FILE - A Wall Street sign hangs in front of the New York Stock Exchange in New York, on June 14, 2022. Stocks are opening broadly lower on Thursday, July 14, 2022, on Wall Street after another hot reading on inflation, this time for wholesale prices, has investors bracing for another big interest rate hike from the Federal Reserve later this month. (AP Photo/Seth Wenig, File) (AP)

  • Bottom fishing operates under the premise that the price of the security is undervalued and a brief price reversal is predicted. Continue reading to learn more about its benefits and drawbacks.

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Bottom fishing is one of the many techniques applied in the stock market which involves buying stocks when they are at their most condensed or discounted levels. It does not, however, only include buying any dropping stock. A genuine bottom-fisher selects the fundamentally sound assets that have seen brief consolidation because of environmental circumstances rather than individual ones.

It is a high-risk approach that is employed with the hope of making a rapid, short-term profit; at the time of investing, technical and fundamental indicators may or may not completely support it. Bottom fishing is primarily justified by the notion that the security's price is undervalued and a short-term price reversal is anticipated.

What are the advantages of bottom fishing?

It provides a bigger payout in a shorter amount of time. In the event that the security reverses, the return potential is greater and faster than with regular investments.

It may be backed by technical configurations in which an asset is regarded oversold on several time frames as a result of vigorous selling without a corresponding change in its economic fundamentals and business prospects.

What are the disadvantages of bottom fishing?

Although bottom fishing is regarded as a short-term profit-generating technique, it has occasionally been seen that such securities take longer than usual investing to recover, which prevents the goal for choosing this strategy from being achieved.

It is a high-risk technique that is opposite to the momentum investing approach and is not appropriate for all types of investors.

Should new investors go after this technique?

It is advisable to wait out the bear market if you are a new investor who has only recently begun investing in stocks than to risk losing money. Before engaging in bottom fishing, you must comprehend a bear market. Bear markets, for instance, can deplete your portfolio, and stocks that you currently think are undervalued can become really cheap in the future.

A bear market may last for a number of months, hence, waiting a few months before engaging in bottom fishing seems sense because the market could be quite turbulent. It would be beneficial if you had money on hand to engage in bottom fishing and purchase high-quality equities whenever the market experienced a large correction.

Bottom fishing can occasionally be a hazardous tactic since it is hard to tell whether the stock has corrected sufficiently and is ready to recover. Considering factors such as the global environment, the asset's fundamentals, debt, the management of the firm, and its future goals is crucial. And of course, "do not put all your eggs in one basket," as Warren Buffet advises the investors.

This story was first published on MintGenie and can be accessed here.

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