A special situation is something which will have an impact on the value of a security and prompts investors to act in response to the situation, rather than utilizing other investment strategies. People may also refer to a security itself as a “special situation” when circumstances considered “special” are about to change the security's value. A special situation is not something which will be announced in a stock market ticker. Investors must follow a variety of sources of information to keep track of special situations as they emerge.
A number of things can be considered special situations. Some examples include mergers, bankruptcies, acquistions, spinoffs, hostile takeovers, and earnings surprises. Special situations can cause the value of a security to go up or down, depending on the nature of the security. They can also happen very rapidly and sometimes this leads to panic and a proliferation of conflicting information which can confuse investors.
An investor must be alert to special situations, for several reasons. One obvious reason is that investors want to be able to act on a special situation if it presents an opportunity for profit. For example, if someone believes that a security is about to rapidly increase in value because of a special situation, it makes sense to acquire some of it in order to make money. Investors also need to on guard for special situations which will affect the value of the securities they already hold so that they can make decisions about whether or not to retain their holdings.
A special situation is, by nature, time sensitive. People need to be able to act quickly because there may be only a small window of opportunity. Special situations also don't necessarily abide by regular business hours, which is one reason why investors try to keep constantly current with the news and changing market forces, so that they can be prepared to act rapidly.
Some consulting firms and investment companies specialize in special situations. These companies track securities and assist investors with making decisions about what to invest in and when. These consultants can be found in most major markets. People who are less comfortable with the rapid circumstances of special situations can use such consulting companies as portfolio managers, paying fees to have them make investment decisions in a timely fashion. These companies also provide assistance to companies which find themselves in a special situation and need consulting services.