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Falling Knife

What is a 'Falling Knife'

A falling knife is a slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless.

A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment.

Explaining 'Falling Knife'

As the phrase suggests, buying into a market with a lot of downward momentum can be quite dangerous. If timed perfectly, a buy at the bottom of a long downtrend can be rewarding - both financially and emotionally - but the risks run extremely high. This term implies that the investment will never be a good one again. Examples of stocks that have plummeted are plentiful; a widely-held stock can drop precipitously as the equity ownership is reduced to nothing.


Further Reading


Catching falling knives: Speculating on market overreaction
papers.ssrn.com [PDF]
… Part of this research project was undertaken while I was visiting the London School of Economics, whose hospitality is truly appreciated … 2 Page 5. Supply-informed traders are “catching falling knives”: they buy when price drops are … to “catch a falling knife” …

A theoretical framework for the analysis of the current global economic crisis: The financial market and the real economyA theoretical framework for the analysis of the current global economic crisis: The financial market and the real economy
journals.sagepub.com [PDF]
… Part of this research project was undertaken while I was visiting the London School of Economics, whose hospitality is truly appreciated … 2 Page 5. Supply-informed traders are “catching falling knives”: they buy when price drops are … to “catch a falling knife” …

Group-think and the current financial crisisGroup-think and the current financial crisis
link.springer.com [PDF]
… Part of this research project was undertaken while I was visiting the London School of Economics, whose hospitality is truly appreciated … 2 Page 5. Supply-informed traders are “catching falling knives”: they buy when price drops are … to “catch a falling knife” …

Feeling Lucky: What Drives Economic Optimism?Feeling Lucky: What Drives Economic Optimism?
search.informit.com.au [PDF]
… Part of this research project was undertaken while I was visiting the London School of Economics, whose hospitality is truly appreciated … 2 Page 5. Supply-informed traders are “catching falling knives”: they buy when price drops are … to “catch a falling knife” …

Interest rates under falling starsInterest rates under falling stars
www.aeaweb.org [PDF]
… Part of this research project was undertaken while I was visiting the London School of Economics, whose hospitality is truly appreciated … 2 Page 5. Supply-informed traders are “catching falling knives”: they buy when price drops are … to “catch a falling knife” …


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