An idiomatic phrase that describes a security whose price or value has rapidly decreased in a very short period of time. In general, securities fall because of bad news. More specifically, falling knives can be caused by firm-specific reasons such as announcement of losses, significant drops in earnings, or technological obsolesce of products, or also by external factors like negative investor sentiment, sectoral changes in terms of industry structure, new entrants, natural catastrophes, etc.

It is often said that there’s money to be made from catching falling knives, but the challenge is doing it without losing a finger. In other words, trying to buy a falling knife stock can be quite risky because it may continue its falling streak after buying it. Therefore, this would require perfect timing and precautionary plans. An investor will be required to divide his money into chunks (thirds or fourths) and observe the price behavior at each buying point in order to decide his next action.