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.
MomentumFalling prices can gain and sustain momentum for a considerable period of time as people panic or give up to limit their losses.
SentimentThe negative feelings surrounding a stock that has declined dramatically may linger for a while making a reversal difficult.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.
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