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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” …



Q&A About Falling Knife


How do you know when to sell out of an investment with downward momentum?

You don't, it's risky.

Why would someone buy into an investment with downward momentum?

If timed perfectly, buying at the bottom of a long downtrend can be rewarding both financially and emotionally.

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.

What are some examples of stocks that have plummeted?

Some widely held stocks have dropped precipitously as equity ownership is reduced to nothing.

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