What it is
In investing, dry powder is an informal term for cash reserves that are set aside specifically to purchase investments.
Individuals, companies, and institutional investors may hold dry powder to have money to deploy whenever there’s a good opportunity to invest.
What it means for you
Dry powder is the cash portion of your investment portfolio. It can allow you to act quickly when you find a new investment that fits your needs or the time is right to put more money in an existing investment.
For example, if the price of a valuable stock suddenly drops – but you believe in its potential to recover and grow over time – you might be able to buy the dip with enough dry powder.
This term has origins in early military operations, when soldiers needed to keep dry gunpowder for use in cannons and other firearms.
While having ample dry powder can be useful, you might want to avoid holding too much cash. This is because cash doesn’t grow in value and can even lose its purchasing power due to inflation.
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