Falling Knife

A falling knife is a metaphor used in financial investing to describe the purchase of a security that has declined in value significantly. The term is often used to warn investors against buying a stock that has already fallen sharply, as there is no guarantee that it will rebound.

There are a few reasons why investors should be wary of buying a falling knife. First, there is no way to know for sure whether the stock will continue to fall. Even if the stock has been oversold, there is always the possibility that it could fall even further. Second, even if the stock does rebound, it may not recover all of its losses. This means that investors could end up losing money even if the stock does eventually go up.

Finally, buying a falling knife can create a psychological trap for investors. When a stock price falls sharply, it can be tempting to buy the stock in the hopes of catching a rebound. However, this is often a mistake. Investors who buy falling knives often end up losing even more money as the stock continues to fall.

There are a few exceptions to the rule that investors should avoid buying falling knives. For example, if a stock has fallen due to a temporary event, such as a negative earnings report, it may be worth buying if there is reason to believe that the event will not have a lasting impact on the company's fundamentals. Additionally, investors who are willing to take on a high degree of risk may choose to buy falling knives in the hopes of making a quick profit. However, it is important to remember that this is a risky strategy and that investors should only do so with money that they can afford to lose.

If you are considering buying a falling knife, it is important to do your research and understand the risks involved. You should also have a clear plan for how you will exit the investment if the stock continues to fall.