How to trade during earning result of stocks

What is earnings season?

Earnings season is a period during which a lot of public companies release their earnings reports, which contain information about the company and its finances, as well as trends in the industry and economic growth more broadly.

The information gives shareholders and traders insights into the outlook for a company, which can influence decisions about whether to buy or sell shares.

How to trade during the earnings season?

To be able to successfully navigate the tricky earnings season, all that you need to do is keep the following points in mind.

1. Use an earnings season tracker

Firstly, before you even think of trading during the earnings season, you need to know which companies are slated to release their earnings reports - and when they plan to do so. And how do you get to know these details? You can make use of an earnings season calendar. You can find them online - and use them for free.

2. Keep yourself updated

If the company that you’ve decided to invest in is unfamiliar to you, the first thing that you would need to do is read all about it. Go through the latest news and announcements to get an idea of the company’s historical and current performance. If possible, go over its financial statements as well. This will give you a much better perspective on the company’s business and performance thus far.

3. Know what the market expects

Now, as soon as the earnings season starts, stock market analysts and investors will release their views and put out their varying degrees of expectations. Don’t take these lightly, since they represent public sentiment. For instance, if the company’s results are in line with or exceeds the expectations of the market, the chances of its price skyrocketing goes high. To stand a chance of benefit from this, you would have to time your trades according to how the company’s earnings look in comparison to what the market expected.

4. Account for increased volatility

As you’ve already seen above, stock market activity is usually at its peak during the earnings season. Therefore, the market is likely to be very volatile with wild swings in price. This is especially true on the day the earnings report is to be released. So, when trading during the earnings season, always ensure that you account for this increased volatility. A good idea would be to refrain from trading as soon as the market opens and during the day of the stock’s earnings report release.

5. Ensure that you place a stop loss

Considering the increase in volatility, if you do decide to trade, it is advisable to place strict stop losses for each trade that you make during the earnings season. Before getting into a trade, ensure that you set a realistic profit target as well as a stop loss target. And once you’ve placed a stop loss, it is best to stick with it - even if it means that you would have to take on a small loss.

What is an earnings report?

An earnings report is a collection of financial statements that companies issue during earnings season, which details their profits (or losses) over the previous financial period. It’s divided into three sections:

The balance sheet – reports a company’s assets, liabilities and shareholder equity

The income statement – shows a company’s revenues, expenses and profitability

The cash-flow statement – summarises the amount of cash and cash equivalents entering and leaving a company

Together, these documents allow investors to take a peek under the hood of a company’s operations and see how they’re currently performing, and how that might change in the future.

Learn how to read an earnings report.

There are a huge number of different figures that are covered throughout these three statements, but there are a few that analysts and market participants keep their eye on. These are:

Revenue – also known as the top line – is the money a company makes from its business operations. Companies will focus on revenue figures as a way of assessing demand for products and services, but it’s important to look at how it stacks up against net income. A high revenue coupled with a low or negative net income means a company isn’t managing its costs effectively, and this can be cause for concern. Learn more about revenue

Net income – also known as the bottom line – is the profit earned for the period. It’s calculated by subtracting costs from revenue. Investors look at net income to decide whether a company is stable, as consistent profits mean it’s more likely to survive, thrive, and attract future investment. Find out more about net income

Operating expenses is the money a company has spent throughout the quarter in order to make its products. It includes things like research and development, marketing, employee salaries and so on. While these detract from net income, some expenses are viewed positively by markets. For example, investment into R&D or additional headcount can be a sign the company is expanding and confident in its future

Earnings per share (EPS) is a popular metric that measures how much money a company makes per share of its stock. It is one of the most-talked-about figures to come out of a company’s earnings report, as it’s a key way of estimating corporate value. A higher EPS demonstrates higher profitability, which means more money available for reinvestment or paying a dividend to shareholders. Learn about financial ratio analysis

Earnings report information can be found on sec.gov, on company websites and across a range of financial publications.

A quick recap

According to SEBI’s rules, all listed companies are mandatorily required to publish their earnings report every quarter. This is calle earnings season.
Firstly, before you even think of trading during the earnings season, you need to know which companies are slated to release their earnings reports - and when they plan to do so.
If the company that you’ve decided to invest in is unfamiliar to you, the first thing that you would need to do is read all about it.
As soon as the earnings season starts, stock market analysts and investors will release their views and put out their varying degrees of expectations. Don’t take these lightly, since they represent public sentiment.
When trading during the earnings season, always ensure that you account for this increased volatility.
Considering the increase in volatility, if you do decide to trade, it is advisable to place strict stop losses for each trade that you make during the earnings season.

Earnings report trading strategy

Applying an earnings report trading strategy involves identifying the right stocks to follow, putting the time in to research their estimated earnings compared with analysts’ expectations, and building a risk management plan.

1. Identify the right stocks

Identifying the right stocks is crucial in preparation for trading earnings. Now’s probably not the time to choose to trade a company you know nothing about. Instead, you should focus on companies that you have prior knowledge of and can understand how their share price reacted to previous earnings.

Some traders will choose to focus on larger stocks whose results impact wider industries, known as bellwether stocks. Not only do they experience high trading volumes, but their earnings can act as a guide for the rest of the sector.

2. Research your stocks

Researching your chosen stocks involves looking at analysts’ expectations of the upcoming earnings, as well as learning about prior earnings performances and, naturally, being aware of the dates that the company earnings are on.

Remember, while past results may give clues on how a specific stock might react to upcoming earnings reports, price movements after reports can be unpredictable. Earnings that are better than expected may not experience price gains, just as disappointing earnings may not spark a bearish run.

3. Manage your risk

When applying an earnings strategy, you should consider the high level of risk that comes with potential spikes in volatility and pay particular attention to a risk management plan, including profit goals, stop placement and hedging where necessary.

Also, those who favour technical analysis should be aware that earnings releases have the potential to disrupt ongoing price trends, making it wise to place less emphasis on indicators such as key Fibonacci retracements at this time.