How It Works

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.

Catalysts can drive an investment up or down. A favorable event can push a stock to new heights, but if events turn sour, the exit for these shares can be very narrow and very crowded.

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.