Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Catalyst

What it is:

A catalyst is news or information that changes a pricing trend in a security.

How it works (Example):

Let's assume that Company XYZ announces earnings that far exceed analysts' expectations. This information could serve as a catalyst that kick-starts trading in the stock and changes its perception from a "dog" to a "star" among investors.

Catalysts can drive an investment up or down. A favorable event can push a stock to new heights, but if events turn sour, the exit for these shares can be very narrow and very crowded.

Let's take the example of a classic investment catalyst: adverse press publicity. A fundamentally strong company can get unfairly beaten up by the press and by analysts, driving down its stock price to unjustified lows. In this case, the catalyst would signal a great opportunity for investors to buy, not sell.

Why it Matters:

Catalysts can change the perception of a security. They can be almost anything: earnings releases, favorable or unfavorable economic reports, management changes, new products, product recalls, successful (or unsuccessful) marketing campaigns, lawsuits, etc.

Quite often, catalysts are the news or events that finally call attention to fundamentals or other intrinsic factors that have existed for some time in a security. When investors can identify what events or information will be catalysts for a particular security, they essentially are able to predict which way the security will go if and when the information becomes public knowledge.

However, catalysts must be considered within the context of investment strategy. Investors buy when they anticipate the market will rise; they sell when they anticipate the market will fall. Catalysts are only one factor in the equation.

Related Terms View All
  • Warehouse Receipt
    Let's say John Doe buys a coffee futures contract. On October 31, the contract expires...
  • Tape Is Late
    Let's say that trading volume on the NYSE quintuples one day after the government...
  • Tick Test Rules
    Also known as a minus tick, a downtick occurs when a security sells at a price less than...
  • Junior Issue
    For example, if Company XYZ issues preferred stock, those shares are senior to Company...
  • U.S. House Financial Services Committee
    The U.S. House Financial Services Committee also has jurisdiction over the country's...