Are you catching falling knife ?
Is it possible to catch a falling knife?
This is the phrase used to describe someone who is buying a falling stock. I experienced when I was buying core education in 2013. It was my initial years in buying and selling stocks. I had done this multiple times in many other stocks and this I can never forget as it exactly coincides with this phenomenon of catching the falling knife.
I was watching this stock for a while which had moved higher and higher for the last few months. As it was in the education sector I didn’t doubt and just a little research on the company on google. It was there in the market for a very long time. On one day the stock kept falling and I thought this as an opportunity. I bought it by the end of the market timing when it had fallen by 50%.
The next day was a shock when it kept falling and then I was searching for answers on google. There was huge debt and they failed in payment. In one week’s time, the stock reached a single digit. Now for the last 6 years, it stays in single digit.
“Catching falling knife” – when this will happen?
You can call the stock market as a gambling market based on so many reasons. Ultimately it is the reflection of the state of the company, sector, and economy. The state of the company is nothing but the balance sheet and accounts related to the company. If there is a profit generation quarter on quarter, then the stock keeps moving higher. If there is a drop in that, then there is a dropping price.
For someone who is watching from outside and has no idea on these things, it will fall into the trap. One of my close friends had bought Gammon Infra. He bought it when the stock was at around 20 Rupees. Almost a few years back and the stock kept falling. Being in the infrastructure domain and with the Government’s constant push for infra growth, he believed in this stock. So he kept adding stocks whenever there is a huge fall. He had invested around 8 lakhs and now the stock is in 28 paisa.
How to protect yourself from these killer knives?
The first mistake is to avoid a small-cap stock even if it looks from outside. I have bought it as a novice and even my friend bought it without knowing anything.
Secondly, don’t keep adding your investments. It will be a dead investment. My friend had kept adding in it as the price kept falling.
Thirdly, there is nothing wrong in asking someone for help, these are the type of companies which will never come up. They are wealth destroyers.
Fourth, Start small whenever you are investing in a stock market. Also, you should not invest an entire amount in a single stock.
Fifth, Have a Stop loss even if it is an investment. So that you don’t lose money beyond a point.
Sixth, Get out of the stock. Better to exit and invest the remaining amount in a standard bluechip rather than sticking with it.
The stock market is for everyone and it is our responsibility to understand the rules of investment. Please share your comments below.