“Earning season is to investors what candy is to Halloween.”
– Some random dude on the internet.
Earning season is upon us once again, and in this article, we will break down precisely what that means for investors and how they can take advantage of this ridiculously volatile period in the markets.
The definition of Earning Season
Earning Season is the period of time when most publicly traded companies release their quarterly or annual corporate earnings to the public. This usually begins one or two weeks after the last month of each quarter, so typically December, March, June, and September.
These quarterly reports are highly anticipated events, especially for traders who favor stocks over other instruments. Depending on the numbers, investors are inclined to either bid up the price of a given stock or pummel it down. Either way, it presents a unique opportunity, especially for CFD traders, who have the advantage of being able to gain from the volatility regardless of the market direction.
The Importance of Earning Season for investors
During this time, there is typically a significant movement in the market after each company releases a report regarding its respective shares. It is not entirely uncommon to see shares rise up to 20% or more or see them plummet by the same percentage.
Extensive media coverage from prominent financial news media, such as the Wall Street Journal or Bloomberg, can provide information on whether the companies have met, exceeded, or entirely missed the expectations of financial analysts.
The combination of volatility in the market and easy access to a plethora of information provides considerable opportunities to take advantage of with careful planning and educated execution.
What to look out for
Within the few weeks that the earning reports last, stock traders can get a unique insight into the fiscal performance of many large companies.
Earning reports usually include:
- Income Statements
- Balance Sheets
- Cash Flow Statement
- Earnings per Share
- An estimation of how the following quarters and/or the overall financial year will go.
Although all this information can help create your trading strategy for the Earning Season, the first three are perhaps the most important.
The Income Statement is, in Layman’s terms, a report of the company’s revenue or the amount of funds accumulated by sales. It also includes the net income, which is the total earnings after deducting expenses.
These numbers can help a trader estimate the income of the company currently, as well as for the next quarter.
The Balance Sheet is important to tell whether the company can afford to pay its bills. It is essentially a report that shows the amounts that the company owes and owns. It is an excellent indicator of a company’s financial health during a given period of time.
Finally, the Cash Flow Statement focuses on the amount of cash coming in and the amount of cash going out of the company. It is useful for understanding where a firm’s finances originate from and where they end up.
How to take advantage of the market during the Earning Season
To make the most of the Earning Season, preparation is essential. To begin with, you need to know which companies are releasing their reports during a given day and what time the reports will be released (can be before, during, or after the market opens). This will help you place your trades at the right time and prevent you from missing out when the movement begins.
This information can be easily found online, on financial websites, and on some Economic Calendars.
Second, you should take a keen interest in the predicted results, according to investors and /or market analysts.
Wall Street firms usually predict the revenue as well as the Earnings Per Share that a company will have by using their models, as well as historical data regarding the company’s performance in the past.
The general rule is that when a company misses the estimate, the price of the share will most likely drop.
The next thing to consider is the fundamentals that will most likely affect the stock price. These include the current Interest Rate, as a change to it can provide a trader with a clearer picture of how the stock price will change after the release. Demand and supply around the time of the earnings release are also important to look at, as they may greatly impact the stock price.
Finally, Make sure you protect your trade through clever risk management. High volatility events, such as the Earning Season, are usually high-risk, high-rewards. Make sure you place a stop-loss on every trade at a point where a potential loss will not hurt your overall investment. Make sure to take careful consideration of your risk-reward probability.
And there you have it! Many traders rub their hands with glee during the Earning Season, because they understand that the potential for profit is exponential. But remember, before you start getting blinded by those dollar signs, as with most things, preparation is the key to success!
By Mario M. Plousiou