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.

RELATED FAQS
  1. What does "guns and butter" refer to?

    Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's ... Read Answer >>
  2. What should I bring to the Series 63 exam?

    Taking the Series 63 exam doesn't have to be stressful. With our guide, you can know everything you need to be prepared on ... Read Answer >>
Related Articles
  1. Personal Finance

    JNJ to Pay $55 Million in Ovarian Cancer Suit (JNJ)

    Health care giant Johnson & Johnson was ordered to pay $55 million in damages to a woman who claimed that the company's talcum powder was responsible for her ovarian cancer.
  2. Investing

    The Risks Of Investing In The Gun Industry

    Investing in the gun industry could be an interesting proposition, but it all depends on timing.
  3. Insights

    Sandy Hook's Consequences For The Gun Industry

    The mass shooting at Sandy Hook Elementary School resulted in share prices dropping for U.S. gun manufacturers. Will there be further consequences?
  4. Financial Advisor

    How Hard is It to Dump Gun Stocks?

    Activist group Gays Against Guns is putting pressure on BlackRock to divest gun stocks held by some of its funds.
  5. Insights

    The Baltic Dry Index: Evaluating An Economic Recovery

    This index can provide insight into economic growth and production, but it has its critics.
  6. Investing

    America's Gun Love Boosts Firearm Stocks As Sales Surge

    It’s no secret that Americans love guns. So much so, that even the mere threat of banning their sales has sparked rising firearm adoption. For investors, that might be a good thing.
  7. Investing

    FBI Gun Background Checks Set a Record in 2016

    Well, so much for the Great Gun Demand Deflation analysts were expecting. The FBI just reported it logged more than 27.7 million background checks on potential gun buyers in 2016, up 19% (4.4 ...
  8. Investing

    Johnson & Johnson Wins Talcum Powder Lawsuit

    But in other lawsuits, plaintiffs say J&J's talcum products directly contributed to cancer.
  9. Insights

    Bang for the Buck: Where Gun Buyers' Cash Could Go

    Some anticipate that stricter gun control laws could reduce the revenue of the firearm industry, but funds not spent on guns could flow into other sectors.
  10. Small Business

    All About The Gun Business In America

    A look at the controversial US gun industry, producers, and market share.
RELATED TERMS
  1. Dry Powder

    A slang term referring to marketable securities that are highly ...
  2. Dry Hole

    A business venture that ends up being a loss. The buzz word "dry ...
  3. Dry Closing

    A type of real estate closing in which the entire closing requirements ...
  4. Beating The Gun

    A slang phrase used when an investor purchases or sells a security ...
  5. Development Well

    A well drilled in a proven producing area for the production ...
  6. Product Line

    A group of related products manufactured by a single company. ...
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center