Earnings is a period of time when a majority of public corporations release earnings reports. There is not much else that impacts stocks like when a company reports earnings! CFD traders will therefore watch earnings reports closely as it is not unusual for the price of a stock to rise or fall significantly immediately after an earnings report. This potential for a stock to move by a large amount in a certain direction in response to an earnings report can create actionable trading opportunities!
The Bigger Picture
The earnings report is a key way for a publicly traded company to tell current and potential investors how it is faring financially. Because it is such an important document, and because it is released by the company itself, investors should realize that it is in the company’s best interest to present as rosy a picture as possible without violating any Securities and Exchange Commission (SEC) regulations.
Preparing for the Release
Information about when companies are going to report their earnings is readily available to the public. However, more in-depth research is required to form an opinion about how those earnings will be perceived by the market. Before considering how you might trade a stock around an earnings announcement, you need to determine what direction you think the stock could go.
It is common practice to closely monitor company-related news before and after the release, in addition to the results of the report itself. An earnings announcement, and the market’s reaction, can reveal a lot about the underlying fundamentals of a company. Moreover, the earnings’ impact upon a stock is not limited to just the issuing company. In fact, the earnings of similar or related companies can frequently have a spillover effect.
Reading The Earnings Report
Earnings reports can be reviewed and interpreted in different ways by different investors. Some prefer skipping the opening sections on financial data to read about the management’s take on the market and the risks facing the company. Some prefer jumping right into the numbers and comparing those to previous quarters and years. Regardless of how you look at the report, breaking down its following key components can help you get a fairly accurate picture of the company’s financial health:
Earnings statement: Details the company’s earnings performance over the specific time period in the report.
Balance sheet: Reports the company’s assets, shareholder equity, and any liabilities.
Cash flow statement: Provides information about the cash flow the company receives.
Considering the Risks
When trading any CFD asset, it is important to remember that traders can be exposed to significant risks if they are wrong about their expectations. The risk of a larger-than-expected loss is significant because of the potential for large price swings after an earnings announcement.
Sources: usnews, investopedia Nov 7, 5:18 PM GMT
