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Making a profit from trading company earnings announcements – a beginners guide

by | May 6, 2018

There are many different styles of investing and the goals of the individual will dictate exactly how they choose to trade. Many investors are looking at a longer term goal, seeking to invest in assets that will bring back a healthy return on their initial investment over a 1-5 year period or far longer. Investors with this goal in mind may choose not to follow the daily business news-cycle, because the news can be just as volatile as share prices, with its own ups and downs, twists and turns, and can prove to be a distraction from a long term goal, or cause them to get nervous and alter their portfolio.

For short-term trading however, following market events, including company earnings announcements, can be very profitable. This blog will cover a short-term trading strategy, which revolves around making a fast profit from company earnings releases.

This is especially useful in the Invstr Investment Game, where fast profit-making is king. Make enough profit to top the leaderboard and you can win weekly cash vouchers to kick start your real investment portfolio!

Why are company earnings announcements important?

Corporate results for a certain quarter of the year, or full financial year, will give a strong indication of how a company is performing. Figures usually include profits and revenues for a particular segment of time, as well as other important metrics such as the change in a stocks earnings-per-share ratio. The most crucial aspect of this from an investors perspective is how the firm’s share price reacts to the set of results. A share price is a reflection of how investors feel about a particular stock, and it can change dramatically when a company releases their latest financial data.

Corporate results usually tell us a few things – namely:

– How has the company performed over the last financial quarter? Has it improved its profits? Its revenues? Its cash flow?

– What does the business expect to happen in the future? Usually the management (CEO, CFO and others) will hold a conference call on the day the earnings are released with shareholders, giving them an update on the performance of the business and (crucially) what they see as the main opportunities and challenges for the future.

The market response to these words and the financial data is what will cause the share price of that company to rise or fall. If the business shows it is growing its strength financially, investors will usually buy the stock, which will cause its price to rise. If the opposite is true, then investors will sell the stock (or close their positions), leading to a fall in its price. A positive set of earnings, when a company beats expectations from analysts, lead to positive sentiment, while a negative set of earnings leads to negative sentiment.

The crucial thing is to conduct a little research into the company before buying or selling. Read some related posts concerning the company in question in the Invstr app on the feed, or on the related tab in an instrument’s glance card. This way you can see what the Invstr community thinks of the stock’s prospects.

Analysts from banks and asset management companies also put forward expectations of how good or bad results will be based on their own research, and you can use this to help you decide whether to buy or sell (go long or short) on a stock on earnings day.

Ultimately, the decision must come down to you – what do you think will happen? Will you follow the trend or go against the crowd?

How do I trade a stock on the day it releases new earnings?

The best time to trade on company results is to buy or sell shares in a company before the results come out, because the biggest falls or gains in the firms share price will usually come soon after the stock starts trading, in other words – volatility is highest at the open. Once the stock has hit a low or a high, your opportunity to make money usually decreases, because volatility (big falls or gains in the price) is likely to relax from then on. On many occasions, companies will release poor or great results causing a major change to the share price, but then by the next day the price will begin to return to normal. To understand why prices in the market move, take a look at this quick guide.

Sometimes results may be so poor or so good, that changes in the share price may continue into the following days. However, in general, the fall or rise in price is a temporary ‘blip’ – you want to invest just before that ‘blip’ comes to take advantage of it.

Let’s look at the results of 2 theoretical companies to illustrate this trading strategy.

Company X

 

 

Company X released earnings on the 12th of April, showing strong growth across the board. 

Immediately after the news broke that Company X had a great first quarter, the price of the stock began to spike (see the arrow).

The right time to buy Company X stock would’ve been before this rapid rise, which would have seen the initial investment grow rapidly, then closing the position, walking away with a profit from the trade.

Company Y

 

 

Company Y released earnings the following day, but its financial results were revealed to be poor, causing the price to plummet as investors sold the stock in response.

The correct strategy would have been to sell the stock before the market opened, then close the position when the price had fallen significantly, before it started to recover.

An option after this would have been to buy Company Y after the price had hit a low, so that when the price begant to return to normality after its big loss, you could make another profit from it’s recovery. This strategy is known as ‘buying the dip’ in the trading community. It’s impossible to predict with 100% certainty when the best time to close a position is – however it is a skill that can be developed over time, and is a key factor in generating the best profits possible. After all, you don’t actually make money until you close your position, or in other words, you sell your shares. 

In simple terms, if you think a company is going to report good results, you want to buy that stock before the market opens on results day. If you think a company will report bad results, you want to do the opposite and sell it before the market opens on results day. In order to maximize your profit on these volatile days, you want to make sure to close the position and take your profit at it’s peak (either when the price has dropped a lot or it has risen a lot).

How do I find out when companies are reporting their earnings?

Invstr has you covered. To find out the dates of earnings releases, simply navigate to the stock of your choice within the app, then tap the feed tab. Here, you are able to see the latest calendar events, reports and related posts for the stock. You can also add earnings results to your Google calendar to remind you of when results are due.

This strategy can be employed easily in the investment game within the Invstr app, which allows you to go long and short on a stock easily with virtual capital, but the principles can also be used to your advantage with real money in the Invstr Portfolio.

Good luck and happy invsting!

 

ALL RIGHTS RESERVED © INVSTR LTD. 2018

Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.
Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.
Brokerage services are provided by the following:
US-traded securities, including fractional trading, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here.
India account traded securities are provided by SIC Stocks & Services PVT Ltd. SIC does not make any personal recommendations to buy, sell or otherwise deal in investments. Investors make their own investment decisions. The services and securities provided by SIC may not be suitable for all customers and, if you have any doubts, you should seek advice from an independent financial adviser. For more information and disclaimers, click here.

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ALL RIGHTS RESERVED © INVSTR LTD. 2018

Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.
Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.
Brokerage services are provided by the following:
US-traded securities, including fractional trading, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here.
India account traded securities are provided by SIC Stocks & Services PVT Ltd. SIC does not make any personal recommendations to buy, sell or otherwise deal in investments. Investors make their own investment decisions. The services and securities provided by SIC may not be suitable for all customers and, if you have any doubts, you should seek advice from an independent financial adviser. For more information and disclaimers, click here.

 

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