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. How can I use an out-of-the-money put time spread for downside risk?

    Learn how using an out-of-the-money time put spread can be used to hedge downside risk by reducing the amount of premium ...
  2. How is implied volatility for options impacted by a bearish market?

    Learn why implied volatility for option prices increases during bear markets, and learn about the different models for pricing ...
  3. Why are growth investors attracted to the chemicals sector?

    Learn why growth investors are attracted to the chemicals sector and what investing strategies they use to make the most ...
  4. Which stage of the economic cycle is most favorable for the chemicals sector?

    Learn how and why shrewd investors rotate into the chemicals sector during the expansionary stage of the economic cycle and ...
RELATED TERMS
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  3. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  4. Graveyard Market

    A prolonged bear market where existing investors want to get ...
  5. Pain Trade

    The tendency of markets to deliver the maximum amount of punishment ...
  6. Bear Tack

    A decline in the price of a stock, sector or market that may ...

You May Also Like

Related Articles
  1. Trading Strategies

    Rules and Strategies For Profitable ...

  2. Stock Analysis

    5 Reasons Sirius XM Haters Are Gone

  3. Technical Indicators

    This Indicator Should Always Be Part ...

  4. Stock Analysis

    How To Get Ready For The Next Bear Market

  5. Investing Basics

    How To Adjust Your Portfolio In A Bear ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!