Catalyst Trading is when you play off of the hype in anticipation to an event that affects a stock's price. This is a very simple way to try to capture profits in, usually, a smaller time frame than most investments. There are many different types of catalysts that can cause a stock price to increase and there are many resources to use to find these catalysts. It is important to understand that just because there is a catalyst, it does not mean that the stock price will be affected by it. When researching into different catalysts, it is clear that some provide higher returns than others. Also, it is important to research into the stock that has the catalyst. An easy way to tell if it is worth investing is looking into that specific stock's previous catalysts. If that stock has previously reacted positively to catalysts, then it is reasonable to assume it will do so again.
With that being said, let's look into some different types of catalysts that are easy to track:
Earnings Reports
An earnings report is when a company announces its quarterly financial data to its shareholders. Depending on the company's historical reactions, earnings reports may be a great catalyst to trade off of. However, not every stock treats earnings reports as a catalyst whatsoever, so it is important to research into the stock's past earnings reports to see how the share price reacted before and after.
IPOs
An IPO (Initial Public Offering) is when a company first begins being traded on the stock market. For most catalysts, investors like to buy the "hype" before the event occurs but in this case, there cannot be any build up to the catalyst because it cannot be traded until the date of the catalyst. For IPOs, there seems to be a strong trend of a huge price increase directly after the stock first goes public. This means that if a stock offers shares at $50, there could be a huge influx of buying that causes it to increase to $55/share. It is important to note that this influx of buying does not last long, and may only last a couple hours, or even minutes, after the IPO. Therefore, using IPOs as a catalyst often start as day trades.
If you want to look for later profits, there is more evidence that after this influx of buying stops and the share price decreases, it can usually see another decent increase a few days after the IPO. Therefore, if you buy after everyone starts selling the initial IPO hype, you may be able to enter cheap and sell later after the share price recovers.
SPACs
A Special Purpose Acquisition Company (SPAC) is a company that does not have any operations but only raises enough money through an IPO to acquire an existing company. This may be confusing but here is an example: The SPAC known as $BETA does not create any products whatsoever. When they went public, they made enough money to acquire another company known as Company X. Therefore, $BETA merges with Company X and changes their ticker symbol to $COMP.
This is a good catalyst because it often allows for two major profits. The first being the original announcement that the SPAC is acquiring another company. This usually leads to very short-term massive increases in share price. This is usually a day trade or short-term swing trade. The next opportunity is leading up to the date of the acquisition. While this opportunity longer and usually does not see as high profits, it is much safer and easier to predict. Depending on your style of trading, you can decide which opportunity to trade, if not both.
FDA Approvals
An FDA Approval (also called a PDUFA) is when a biotechnology stock gets their newest product approved by the FDA. Many investors like this catalyst because they are easier to track, but the actual approval of the product is speculation. This is why it is very similar to earnings reports in the fact that not every stock reacts to an FDA Approval. It is important to look into a stock's past FDA Approvals to see how it reacted and trade it accordingly.
If you are looking to trade penny stocks, many investors like using biotechnology penny stocks with FDA Approvals to try to capture large profits. This is because penny stocks are very difficult to track and are sometimes not regulated by the SEC, so FDA Approvals are the best thing to use for catalysts. However, trading biotechnology penny stocks is very risky because their products regularly get denied by the FDA and result in a huge decline in share price.
Now, you hopefully understand what a catalyst is and know a few good examples. As an important note, many investors only trade the reaction before/after the catalyst occurs. While some do hold their position through the date of the catalyst, many sell before the catalyst/buy after the catalyst to protect themselves from huge losses.
Remember, these are just some of the most popular catalysts that are the easiest to predict. There are many other catalysts that you may like and we encourage you do more research into these to find which best fits your trading style.
To end off, we'd like to leave you with a great tool to help future trading. Click here for Benzinga's Catalyst Search. This tool allows you to search any stock during market hours and determine why the share price is moving. Always do you research into a stock before trading it just for an upcoming catalyst, as you may result in huge losses without proper research.