What is a Catalyst For a Particular Trade or Investment?

A Catalyst is an Underlying Story, Upcoming Event, or Some Other Reason For a Stock to Move:

When it comes to researching potential trades and investments, individuals typically focus on at least one of three categories – technical analysis, fundamental analysis, and catalysts. Short-term traders tend to emphasize technical analysis and long-term traders tend to emphasize fundamental analysis. But one of the best indicators of a substantial move in a stock’s price, in my opinion, is a strong catalyst (no matter what the technicals and fundamentals may show). Of course, the more criteria that lines up the better. But a strong catalyst can have an impact on a stock’s future price action like no chart or financial ratio can.

For example, there’s a particular penny stock called Liquidmetal Technologies, Inc. (Ticker: LQMT) that always seems to spike 25-100% on rumors that their technology will be used within the Apple iPhone. Even though the fundamentals of the company are poor (it’s a penny stock for a reason) and the technicals may not necessarily warrant an entry, short-term traders attempt to position themselves within this stock as the launch date of new iPhones approach. It’s the story that drives the stock higher and not much else – the potential that Apple will use Liquidmetal’s technology in every single iPhone. That kind of exposure is huge for a small company like LQMT. Overall, a strong catalyst can bring in a substantial amount of volume and change sentiment in a given stock. It’s important to realize that actual success isn’t the only reason for a stock to move – hype can have a significant impact on a security’s price as well.

Related Post: What’s the Trading “Fantasy Gap”?