What is a Falling Knife?

John Spacey, updated on March 02, 2017

A falling knife is a stock that is rapidly falling. The term extends from the analogy that buying a falling stock is like catching a falling knife. This implies that a declining stock is dangerous to buy due to factors such as momentum, sentiment and information asymmetry.

Momentum

Falling prices can gain and sustain momentum for a considerable period of time as people panic or give up to limit their losses.

Sentiment

The negative feelings surrounding a stock that has declined dramatically may linger for a while making a reversal difficult.

Information Asymmetry

If you feel that a stock has fallen too far and is cheap based on your information it can be difficult to know if someone else has better information. Insiders or bank analysts who are advising clients may know something you don't.

Overview: Falling Knife
Type	Behavioral Finance
Definition	A stock that is rapidly falling.
Meaning	A stock that is falling rapidly is dangerous to buy due to factors such as momentum, sentiment and information asymmetry.
Related Concepts	Information Asymmetry Investing Risk Investing Behavioral Finance Animal Spirits Trees Don't Grow To The Sky