Definition
The term catching a falling knife refers to an investor purchasing a security as its price drops significantly. An investor will attempt to catch a falling knife when they believe a security's value is about to rebound.
Explanation
As the phrase implies, catching a falling knife is dangerous. When the price of a security is falling rapidly, it's very difficult for an investor to predict when the security's value is going to rebound. In fact, the company can go bankrupt, and its shares of common stock can lose all of their value.
Market sentiment towards the security can also drive its value down, even if the longer-term outlook for the company is improving. That being said, investors do catch falling knives successfully. When this happens, the financial rewards can be great. To increase the chance of success, the investor should ensure the company has the ability to increase earnings over the long term. That is to say, there is some fundamental reason the company's value will eventually rise.
Related Terms
The term Monday effect is used to describe a historical trend, whereby the trading pattern of a financial market on the previous Friday will continue at the opening bell on Monday. The weekend effect is believed to be a result of increased investor pessimism on Saturday and Sunday.
Moneyzine EditorNovember 6th, 2024- The term weekend effect is used to describe a historical trend, whereby financial markets tend to decline more on Monday if there was a decline on the preceding Friday. The weekend effect is believed to be a result of increased investor pessimism on Saturday and Sunday.Moneyzine EditorNovember 6th, 2024
- The term suckers' rally refers to a temporary increase in the value of a financial market or individual security, despite the lack of an improved outlook. A suckers' rally is classified as a secondary trend, since they are typically short in duration.Moneyzine EditorNovember 6th, 2024
The term January effect is used to describe a historical trend, whereby the prices of securities rise in the month of January. The January effect is classified as a secondary trend, since it is relatively short in duration.Moneyzine EditorNovember 6th, 2024
