Falling Knife
A “Falling Knife” refers to a Stock or Asset that has experienced a significant and rapid decline in price, leading investors to believe that it is undervalued and may present a buying opportunity. However, attempting to buy into a falling knife can be very risky, as the Asset may continue to decline further.
Examples of Falling Knife scenarios include:
- Example 1: A technology company announces disappointing earnings, causing its Stock to drop 30% in one day. Investors speculate that the price will rebound, but it continues to fall for several more weeks.
- Example 2: A pharmaceutical company faces regulatory issues that lead to a sharp decline in its Stock price. Traders believe the Stock is a bargain at $50, but it further drops to $30 before stabilizing.
Cases where investors successfully caught a falling knife include:
- Case 1: An established retail brand’s Stock falls sharply due to a temporary Supply Chain disruption. Savvy investors who buy during the downturn profit when the company resolves the issue and the Stock rebounds.
- Case 2: An energy company experiences a sharp decline due to fluctuating oil prices. Investors who recognize the company’s strong fundamentals may purchase Shares, benefiting when the market stabilizes.