When you read articles and blog posts about investing, you’ll be inundated with the importance of researching any stock before investing in it. While this does involve looking at the stock’s history, it also includes looking at how external factors will affect the price of that stock. Those factors are commonly called stock catalysts, and this overview explains how they affect investing decisions.
Defining a Stock Catalyst
A stock catalyst is something that will significantly impact the price of a stock. This can be an event that specifically affects the company of that stock, such as a change in management. This type of event is called a hard catalyst because it’s something that relates to the specific organization. In addition to organizational changes, it can involve the supply chain or logistics of the company.
Soft catalysts also have significant impacts on a stock price, but these factors affect the company indirectly. For example, a tornado that wipes out a large amount of a specific crop can affect the stock of a company that uses that crop to manufacture their products. On a more global scale, the recent Covid-19 pandemic has affected many stocks and is also considered a soft catalyst.
Judge a Catalyst by Stock Volume
A stock catalyst can influence the movement of a stock in an upward or downward trend. Depending on your position, either direction can be advantageous, but it’s always important to watch the volume in relation to the catalyst. Volume refers to the number of trades that take place with that stock within a specified time frame. If the volume isn’t substantial, this indicates there isn’t a high interest in the stock, and its mobility may be short-lived. In fact, you want to see high volume in relation to a catalyst before making a move with that stock.
Make Volatility Work for You
You will also want to pay attention to the stock’s volatility, or the rate at which the price rises and drops. Higher volatility, or more rapid movement, can be used to your advantage if you’re a savvy investor. If you don’t have the time to watch the market in real-time, choosing stocks with lower volatility is probably a better strategy. In this way, your perspective will have a bearing on whether a catalyst is affecting a stock positively or negatively.
While there are many factors that affect the volatility of a stock price, looking at catalysts is an important part of investing. How you interpret catalysts will determine how successful you are in investing. As with any skill, interpreting stock catalysts is a talent you can acquire and hone over time as you gain more experience.