What is a 'Catalyst'

A catalyst in equity markets is a revelation or event that propels the price of a security dramatically up or down. A catalyst can be almost anything: an earnings report, an analyst revision, a new product announcement, a piece of legislation, a lawsuit, an outbreak of war or unrest, an offer to buy a company or merge, a move by an activist investor, a comment from a CEO or government official, or the conspicuous absence of a company officer at a special event.

In general, it is a news item that has no immediate effect on the fundamentals of a stock, but rattles investors, breaking the price's upward or downward momentum – or sideways lack-of-momentum – and unlocking value (in the case of a rise in price) or bursting a bubble (in the case of a fall).

BREAKING DOWN 'Catalyst'

Depending on their approach, investors will assign different levels of importance to catalysts. Pure value investors ignore catalysts entirely and look instead for operational efficiency, goal-oriented management, reasonable valuation and strong market position. For these investors, catalysts are pleasant surprises – assuming they were correct in their assessment of a company – either providing an opportunity to build up a position cheaply (in the case of falling prices), or realizing the value they'd seen all along (in the case of rising prices). Pure momentum investors, meanwhile, will watch carefully for catalysts, or their effects on prices, trying to be the first to recognize them for what they are and to buy into a bullish turns, or bow out of bearish ones.

In reality, few investors are entirely one or the other, but fall somewhere along the value-momentum spectrum. An investor might concentrate primarily on a company's fundamentals, but acknowledge that a catalyst will be necessary to realize that value. They might devote significant thought to what that catalyst might be, keeping their ear to the ground when it comes to new products and the state of markets where the company operates.

At the same time, the bulk of momentum investors will have some sense of what companies might be undervalued or off the mainstream market's radar. They will compile a watch list and a develop a sense of what news might spark price movements, as opposed to being failed catalysts. Few investors focus exclusively on financial statements, at the one end, or retracement levels and trendlines​ at the other. 

Example of a Catalyst: Nike

Since a catalyst can take any number of forms, it's better to give a concrete example. On August 25, 2015, the S&P 500 Index hit a low for the calendar year of 1867.61, 12.51% below its all-time intraday high of 2134.72, which it had hit on May 20 of that year. The decline, which had begun the previous week and hit its stride on August 24, was the steepest since 2011, and dragged a number of quality stocks down out of sheer panic. Nike Inc. (NKE) was one of these: having closed at $114.98 on August 17, it touched $94.50 on August 24.

Yet the business was as solid as ever, and had very nearly recovered by market close on September 24, reaching $114.79. Later that day, the company reported quarterly earnings that exceeded expectations by 12.61%, and the stock shot up to an intraday high of $125.00 the next day. In other words, the catalyst of an earnings surprise propelled Nike's share price upwards by 9.71% in less than 24 hours (and 33.27% in a little over a month), despite lousy prevailing market conditions.

The change was due to new information and a resulting change in investors' perception, not the fact that Nike was 109.71% as valuable on Friday as it had been on Thursday, or 133.27% as valuable as it had been a month ago. Catalysts arise because of market inefficiencies: herd mentality, information asymmetry, blind spots and out-of-whack valuations.

RELATED TERMS
  1. Profit Taking

    Profit taking is the act of selling a security in order to lock ...
  2. Average Up

    Average up is the process of buying additional shares in a stock ...
  3. Flat On A Failure

    Closing out a position and taking profits when the security in ...
  4. Shakeup

    A series of events and processes that a company's management ...
  5. Intraday

    Intraday is the high and low price of a security that occur in ...
  6. Momentum Investing

    An investment strategy that aims to capitalize on the continuance ...
Related Articles
  1. Investing

    Credit Suisse Bullish on Nike

    Analysts are increasingly confident in Nike's long-term dominance in North America.
  2. Insights

    Nike: Foreign Exchange Rates Pinch Top Line (NKE)

    The athletic wear maker has gotten into a trend of issuing both good and bad news in its quarterly reports.
  3. Investing

    Nike Beats Q3 EPS Estimates, Profits Surge 22% (NKE)

    Nike extended its streak of quarterly double-digit earnings increase to six, during which its earnings have risen in the range of 18% to 28%.
  4. Investing

    Why Nike's Breakout May Lead to More Big Gains

    Nike Inc. (NKE) shares jumped on Friday by nearly 5% resulting in a technical breakout.
  5. Investing

    For Nike, there is no China Slowdown (NKE)

    The athletic company has done tremendously well in China despite a slowing economy. Find out how Nike has been so successful in this elusive segment.
  6. Insights

    Nike U.S. Sales Plummet (NKE, UA)

    Nike Inc. is losing market share to Adidas and Under Armour Inc., and future forecasts indicate continued challenges ahead.
  7. Investing

    Nike Gets a Broadway and Spring it its Step (NKE)

    This unique five-story store in New York's SoHo will open tomorrow with new experiences for customers.
  8. Investing

    Morgan Stanley Expects Nike to Rally 18%

    Healthier sales will lift Nike’s share price by nearly 20 percent, according to a prominent Wall Street analyst.
  9. Investing

    Nike Stock Rises on Analyst's Bullish Stance (NKE, UA)

    Shares of Nike rose 2.68% Monday to a high of $55.15, rebounding from several weeks of declines.
  10. Insights

    Nike Says It Is a Growth Company (NKE)

    Athletic apparel maker promises more new innovations, such as its Tech Fleece line, to fuel its future.
RELATED FAQS
  1. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  2. What can cause an asset to trade above its market value?

    Learn some of the factors that can affect the price of an investment asset and the major reasons why an asset might trade ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center