What Is a Stock Catalyst?

Overview

In the stock market, a catalyst is an event that causes a large reaction in the price of a stock. This reaction in stock price could either cause the stock price to rise, or cause the stock price to drop.

Understanding Stock Catalysts

Catalysts exist in the market because large events or news from a company can drastically change investor perception about that company. Catalysts are usually well-covered by financial media outlets such as Yahoo Finance.

Sudden Catalyst

A common form of a catalyst is a sudden catalyst. These catalysts cannot be anticipated and are announced suddenly by the company during a press release.

For example, company partnerships are sudden catalysts that are announced without prior notice to investors.

Anticipated Catalyst

Another form of a catalyst is an anticipated catalyst. These catalysts are highly anticipated before the catalyst even happens. They are generally pre-scheduled and can have a strong affect a company's stock price during the days leading up to and including the event. This is caused by rumors and speculation about what the company might share during the event.

For example, product launches such as Apple Release Day or Tesla Battery Day are anticipated catalysts. These events are known well in advance, but the actual product launched is not released until the day of the event.

Anticipated catalysts are listed in advance on websites such as Catacal. Catacal lists upcoming catalysts on a single calendar so you can line up dates with your research.

Stock Catalyst Examples

Here are some examples of stock catalysts:

More examples of stock catalysts can be found on the Catalyst Calendar.

Trading Strategies

Buy the Rumor, Sell the News

Buy the rumor, sell the news entails buying or selling the stock during the 3 weeks leading up to the catalyst event, and selling before the event actually happens.

This strategy is based upon the theory that the stock market will try to price in the catalyst and all its rumors during the days leading up to the catalyst. As a result, the price movement after the catalyst event date is much less if nothing unexpected happens during the catalyst event.

An advantage of this strategy is that the rumor tends to be very predictable. If the stock catalyst event is positive such as a product launch, then the stock is likely to rise before the catalyst occurs.

Trade the Catalyst

Another strategy related to catalysts is to simply hold or short the stock during the catalyst event. This is a highly speculative strategy and is commonly used to speculate on company earnings events.

A disadvantage of this strategy is that it is very unpredictable. Company earnings can be either strong or weak without any prior warning.