In the past, the term fire sale referred to a major drop in product prices after fire damaged the property of a business. Since many of the goods smelled like smoke or were partially damaged, the owners of the business recouped their investment by liquidating as much as possible, even if it meant bringing down prices by a substantial percentage.
Nowadays, while fire sale is still used for situations in which items are sold at huge discounts, it does not necessarily come about as a result of a physical catastrophe. Businesses choose to hold a fire sale when they encounter serious financial difficulties, or even in the case of a looming bankruptcy.
In some cases, this means that the company is ridding itself of all inventory and closing down. For other businesses, it is a way of getting back on track financially to restructure the business.
Selling assets at fire sale prices may not involve actual consumer products. In some cases, a company will have to price its assets lower than the fair market value. This is for the purpose of disposing them quickly and increasing liquidity. Firms which have become insolvent or need to address a financial crisis do this.
For investors, this situation presents a good buying opportunity. However, it is still necessary to do some research on the investment in order to determine how low the prices have really dropped, as well as the potential for profitability of the asset concerned.
