Catch a Falling Knife

ByMunyaradzi Mafaro

“Catch a falling knife” is a saying in the world of investing. It describes when an investor buys the stock of a company that has dropped a lot in price very quickly. The investor hopes the price will go back up soon.

What it Means

Imagine a sharp knife falling straight down. Trying to catch the knife is very risky – you will likely get cut. The same idea applies to a “falling knife” stock. The price is dropping fast and it’s very risky to buy it. You will likely lose money.

The price of a stock can fall fast for different reasons:

  • The company had unexpected bad news
  • The entire stock market is going down quickly
  • Investors are worried and selling the stock

When the price is crashing down, some investors see a chance to buy at a low price. They hope the bad times are temporary. They expect the price to bounce back up. This is an attempt to “catch a falling knife.”

The Dangers

Trying to catch a falling knife stock is one of the riskiest moves in investing. The price has a lot more room to keep falling. Perfectly good companies can see their stocks crash for a short time. But a crashing stock can also mean the company is in very bad shape long-term.

As an investor, you may think you’re getting a bargain price on the stock. You may expect the price to rebound soon. The problem is the price may keep falling even more. Or it may stay very low for a long time. There’s no guarantee it will bounce back up anytime soon.

When it Sometimes Works

In some cases, catching a falling knife can work out very well. This happens if the investor is right and the stock price does rebound quickly. The investor gets the stock for a bargain price and profits as it goes back up.

This is most likely to work if:

  • The stock fell for a reason that’s not related to the company’s health
  • The company is still in good shape overall
  • The investor has done a lot of research and has good reason to expect a rebound

Even in these cases, it’s still a risky move. The stock may not recover as expected. The company’s problems may be worse than they seem at first. So trying to catch a falling knife should only be done with money you can afford to lose.

Munyaradzi Mafaro is a music enthusiast and he also likes to tackle topics of business, productivity, and the possibilities for growth in the digital world.