Definition of catalyst
- That waterway became the catalyst of the area's industrialization.
- He was the catalyst in the native uprising.
The bombing attack was the catalyst for war.
She was proud to be a catalyst for reform in the government.
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Catalyst is a fairly recent addition to the English language, first appearing at the start of the 20th century with its chemistry meaning. It was formed from the word catalysis, another chemistry term which refers to a modification and especially an increase in the rate of a chemical reaction induced by material unchanged chemically at the end of the reaction. By the 1940s, the figurative sense of catalyst was in use for someone or something that quickly causes change or action.
A catalyst is news or information that changes a pricing trend in a security.
Let's assume that Company XYZ announces earnings that far exceed analysts' expectations. This information could serve as a catalyst that kick-starts trading in the stock and changes its perception from a "dog" to a "star" among investors.
Let's take the example of a classic investment catalyst: adverse press publicity. A fundamentally strong company can get unfairly beaten up by the press and by analysts, driving down its stock price to unjustified lows. In this case, the catalyst would signal a great opportunity for investors to buy, not sell.
Catalysts can change the perception of a security. They can be almost anything: earnings releases, favorable or unfavorable economic reports, management changes, new products, product recalls, successful (or unsuccessful) marketing campaigns, lawsuits, etc.
Quite often, catalysts are the news or events that finally call attention to fundamentals or other intrinsic factors that have existed for some time in a security. When investors can identify what events or information will be catalysts for a particular security, they essentially are able to predict which way the security will go if and when the information becomes public knowledge.
However, catalysts must be considered within the context of investment strategy. Investors buy when they anticipate the market will rise; they sell when they anticipate the market will fall. Catalysts are only one factor in the equation.
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