A catalyst in the stock market is something that makes a stock’s price go way up or down quickly. It could be news like a company’s earnings report, changes made by analysts, a new product being announced, new laws being passed, legal issues like lawsuits, companies merging or being bought, or when an activist investor gets involved.
Understanding Catalysts
In finance talk, a catalyst is something that causes a big change in how much a stock is worth. It can be bad news that makes investors worried and stops the stock from going up, or good news that makes the stock price rise.
Different investors care about catalysts in different ways. Some investors, called value investors, don’t focus too much on catalysts. Instead, they look at how well a company runs its operations, if the management has clear goals, if the stock price is reasonable compared to the company’s worth, and if the company has a strong position in the market.
For these investors, catalysts are like nice surprises. If they guessed right about a company, a catalyst might let them buy more stock when the price is low or make money when the price goes up.
On the other hand, pure momentum investors pay a lot of attention to catalysts. They want to be the first to notice when something might make a stock’s price change. Most investors aren’t only one type or the other but somewhere in between, caring about both value and momentum.
Special Considerations
An investor usually focuses on how a company is doing overall, but they know that something needs to happen to make its value go up. They spend a lot of time thinking about what that something could be. They pay close attention to new products and how well the markets where the company sells are doing.
At the same time, most momentum investors have an idea of which companies might be worth more than people realize, or ones that aren’t getting much attention yet. They make a list of these companies and try to guess what news might make their prices go up, instead of news that doesn’t change much.
Catalyst Example
Kohl’s (KSS) got an offer to buy the company from a group called Starboard Value for $64 per share on January 21, 2022. This made the stock price go up by 37% the next day. Other groups like Engine Capital and Macellum Advisors also bought shares and told Kohl’s to think about selling. The stock price went up a lot in one day many times last year when new investors said they were getting involved.