What it is:
How it works (Example):
Investors that engage in bottom fishing, called “bottom fishers,” hunt for securities that they believe are undervalued in the market or that recently have experienced a significant price drop. If these securities are bought at what is effectively a discounted price, they will gain value and make a profit once the price recovers.
To illustrate, suppose a bottom fisher spots a stock whose price fell from $100 per share to $60 per share over two days. The investor researches the issuing company and finds no fundamental change for the drop in price, so he determines it was due to market forces. He buys ten shares for $600. Over the following week, the price steadily returns to $100 per share. The investor then sells the ten shares at this price, realizing a profit of $40 per share, or $400 total.
Why it Matters:
However, bottom fishing can be risky since even the most experienced investors find it impossible to account for all factors that affect market prices. Also, it is not always possible to determine if a price decline results from investor behavior or from some fundamental change in the issuing company.