Falling knife

A falling knife is a stock, or any asset, whose price is dropping sharply and rapidly with no clear sign yet of where it will stop. The phrase comes from a trading warning, don't try to catch a falling knife, buying in because a price looks cheap relative to where it recently was can mean buying right before it falls further and getting hurt on the way down.

The difficulty is that a falling knife and a stock that's simply become undervalued can look identical on a price chart alone, both show a sharp decline. The difference is whether the drop reflects a real, lasting change in the business, a falling knife, still falling for a reason, or a market overreaction to news that doesn't actually change what the company is worth, a temporary discount. Telling the two apart means looking at the underlying business, not just how far the price has already fallen.