Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Falling Knife

What it is:

A falling knife describes a stock which has experienced a rapid decline in value in a short amount of time. Just like a falling knife, you don't want to catch these companies on their way down.

[For explanations of nine other strange investment terms, read Dead Cat Bounce -- 10 Strange Investment Terms Explained.]

How it works (Example):

A stock's downward price behavior can qualify it as a falling knife for numerous reasons. In many cases, negative news about an issuing company can initially result in a stock's falling knife behavior subsequent to widespread market divestiture. Under these circumstances, the stock's price will often recuperate in the market in the wake of a positive follow-up announcement by the issuer.

Freddie Mac is a good example of a falling knife. In July 2008, as people realized the true extent of the housing crisis, Freddie Mac saw its stock price fall 77.8% in less than one month.

Why it Matters:

A falling knife represents a stock whose viability as an investment has diminished. Under certain circumstances a falling knife may represent an opportunity to purchase the stock at a low price with the distinct possibility of price recuperation and rapid capital appreciation. Like a falling knife, these companies are safe to pick up only after they've hit the floor.

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