Falling Knife

Definition: Falling Knife

A phrase used for a stock where the price has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value where the shares become worthless.

A stock with a falling knife situation occurs when a business results have a big drop in net earnings or because of increasingly negative investor sentiment.  This phrase is often used to teach new investors not to buy a stock (even one that has been popular) with a dropping price until they see the stock price confirm a turn around.