If you’re new to the stock market, you may have heard the term catalyst quite often. So, what is a stock market catalyst and how do you use them to your advantage? Here’s your answer:
What Is A Stock Market Catalyst?
A stock market catalyst is any event that leads to a price change in the value of a security. Sometimes, these stock market catalysts can lead to significant changes in value. The most common of these events include earnings releases, investor days and product launches.
What Are The Different Types Of Stock Market Catalysts?
While there are several different catalysts that may take place in the stock market, they can all be put in either one of two categories. These categories include:
- Scheduled Catalysts – Scheduled catalyts include catalysts like earnings reports, PDUFA dates in the biotechnology sector, and some presentations. These are the meaningful events that investors know are comming and are often prepared for.
- Unexpected Catalysts – Unexpected stock market catalysts are just what you are likely thinking. These are unexpected events in the market that lead to movement. Events like sudden changes in management, earlier than expected clinical data, and surprise announcements all fall into this category.
It’s also important to remember that these events can have either a positive or a negative affect on the stock that you’re following. Just because a catalystic event is taking place doesn’t necessarily mean that the event will lead to gains in value.
Example #1 – Valeant Pharmaceuticals
On October 21, 2015, Citron Research Group made a name for itself by publishing a short report on Valeant Pharmaceuticals. In doing so, the research firm pointed to discrepancies in sales and even accused the company of using a customer’s help to fudge the numbers.
Surprisingly, the report proved to have truth to it. At the end of the day, an investigation took place and found that Valeant Pharmaceuticals had falsified the numbers when reporting sales to Philidor. Of course, this news turned the company on its head, causing massive declines in the value of the stock on October 21, 2015 and for quite a while to follow.
Example #1 – Eyegate Pharmaceuticals
On July 24, 2018, Eyegate Pharmaceuticals announced that the United States Food and Drug Administration had approved two applications for the company to move forward with clinical studies for an investigational new drug. Of course, clinical studies are an important part of bringing a new treatment to market, so the stock soared as investor excitement ensued.
How To Use Catalysts To Your Advantage In The Market
Using a stock market catalyst to your advantage is actually a bit easier than you may expect. Here are the steps to doing so:
- Finding The Opportunity – The easiest stock market catalysts to find are those that are scheduled. Personally, I like to follow both earnings reports and PDUFA dates. Earnings reports are easy to track with earnings calendars. When it comes to PDUFA dates, iWatch Markets has a great service called PDUFA Watch that tells you when the opportunities are coming.
- Do Your Research – Do your digging to find out what’s expected. If it’s an earnings report, dig in to see what analysts are expecting to see. After all, if projections are beat, the stock will likely climb. On the other hand, if projections are missed, the stock can see big diclines. When it comes to PUDFA date tracking, research the drug the application surrounds. Look into clinical trials, advisory board votes, and other data that gives you an idea of whether the drug will be approved or declined.
- Get Prepared – To get prepared, on the day that the news is expected to be released, open your trading platform and be ready to trade the stock at the center of the news. Make sure you’ve got your chart up and your news source ready so that you don’t mis a beat.
- Make Your Trade – When the news is released, take no more than 3 minutes to quickly scan the news for key points. From there, take a look at your chart and define the trend. Once you’ve got a defined trend, chances are that the trend will continue, at least for a short while. So, make a trade in the direction of the trend. However, be careful, after big runs come big declines. So, when you see a shift in the direction of the trend, get out!