What does it mean to have "dry powder"?

By Tony Daltorio AAA
A:

The term "dry powder" originated during the days when military battles were fought with guns and cannons that used gun powder. The gun powder had to be kept dry in order for it to remain effective. Nowadays, the term "dry powder" is used metaphorically in various contexts and circumstances, including the world of finance.

"Dry powder" in the financial world is used in reference to an individual company's cash reserves, particularly during difficult economic times. These cash reserves may be needed by the company to meet its obligations, so the company may seek to build up its "dry powder" in anticipation of tough conditions ahead.

In the world of finance, the term "dry powder" is used in reference to investors, too. In this case, "dry powder" still refers to cash reserves, but it also can include other liquid assets, such as money market funds that an investor may have set aside for investment purposes.

Many financial advisors warn their clients against investing 100% in the stock market and encourage them to be prudent by maintaining plenty of dry powder. Dry powder of this kind comes in handy during periods of steep market decline because cash reserves do not diminish in value, and you can fall back on these savings when needed. Moreover, it can be especially beneficial to the investor who chooses to buy stocks at substantially lower prices during such periods of decline.

To learn how to create your own emergency savings, see Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?

This question was answered by Tony D'Altorio.

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