Wednesday, November 28, 2012

Investing and Trading Around Stock Earnings Announcements

Did you know that we can use corporate earnings information as more or less a stock trading tip? Longer term investors are typically very concerned about what effect corporate earnings will have on currently open positions that they may have in a company that is about to announce earnings. Short term traders have similar concerns regarding short term trades they may be considering. If you are making a short term trade in a company that is just about to announce their earnings it may be a good idea to pass on that particular opportunity until the earnings announcement has been made. The reason for this of course is that analysts make their predictions about what corporate earnings will be for publicly traded companies so when those predictions are announced the market will immediately bake that information into the pricing of the company’s stock. When the earnings announcement takes place if the actual earnings that are reported by the company are significantly different from the predictions that the analysts made the market will immediately bake the new information in the price sometimes making the price of the stock move quickly and erratically.

In reality this is not a bad thing it is just the market correcting the price based on the new information but when you are a shareholder, especially if you are short term trader and the price drops quickly, it can have a devastating effect. Of course longer term investors are impacted by this to a much lesser degree because of the timeframe of their holding period but regardless of this both longer term and shorter term holders of the stock will be affected. It can go the other way too where there is a good surprise and the stock value increases but it seems that typically the surprise will be to the down side.

The most obvious way to combat this situation is to make sure that you do not trade a stock when an earnings announcement is imminent. To find out the earnings announcement schedule you can go to something like Yahoo Finance to get all of the information that you need.

Click here to review the current earnings reports that are scheduled to be released.

Just type in the information for the company you are interested in and everything you need to know will be presented.

A very commonly asked question around corporate earning and trading is how much emphasis should one place on earnings when making our trading decisions. I would not let earnings announcements handicap your trading but I do believe that they are something to pay close attention to. Longer term holders of stocks may be interested in corporate earnings if they are holding the stocks for their dividends but shorter term traders may want to avoid this situation altogether. Often times when dividends are paid the stock price adjusts by approximately the same amount as the dividend so in many cases there is no clear reason to intentionally trade a stock when an earnings announcement is close.

I believe that if you are watching a stock and a good setup occurs that meets all of your trading criterion you should check that specific company’s earnings schedule before making the trade. If the announcement is off into the future by a few weeks or at least out as far as your estimated trade horizon is make the trade. The main time that an earnings report hurts is when it is under the analysts expectations but regardless of if they meet expectations or not it can still work out to be a good trade. Allot of companies are very profitable but if their earnings fall short even by a little from what the market expectations are the stock price could get hurt in the short term however if it is a good and profitable company this should be of little consequence for longer term investors.

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