How to trade during earnings season?

In the previous chapter, we saw in detail the role that monsoons play in the movement of the stock market. In this one, however, we’re going to take a look at the earnings season and how much of an impact it has on the price movements of stocks. Also, in addition to its significance, we will also be looking at some of the key pointers that you should account for when trying to trade during the earnings season. Without any further ado, let’s begin.

What is the earnings season?

All limited companies that are listed on the stock exchange are required to abide by the rules and regulations set by the Securities and Exchange Board of India (SEBI). Now, according to these rules, all listed companies are mandatorily required to publish their earnings report every quarter.

Earnings season is a term that is used for the months of the year when the quarterly corporate earnings are released for public knowledge. Here’s something that you should know. Not all companies release their quarterly earnings reports on the same day. Therefore, the release of earnings reports happens over a period of time; say over a month or maybe even more. That’s why it is called an earnings season and not an earnings day or a week.

Significance of the earnings season

Since investors have put their hard-earned money into these companies, they’d naturally be eager to learn just how their company has performed each quarter. And so, there’s always a buzz around the time of the quarterly earnings report release. The stock markets become quite active during these days with both old and new investors looking to invest and trade in stocks of companies.

And to top it all off, there’s also extensive media coverage on the companies releasing their earnings reports. As a result, any earnings-related announcements, whether positive or negative, are likely to have instant reactions in the stock market. For this reason, many investors tend to stay away from trading during the earnings season. However, that doesn’t always have to be the case. In fact, if you play your cards right, you can trade safely during the earnings season. Keep reading to find out how.

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.

Wrapping up

Contrary to popular opinion, the earnings season is a great time to buy stocks. You sometimes get the chance to purchase fundamentally strong companies at attractive prices on account of a negative market reaction due to sub-par quarterly performance. Or alternatively, you will get a chance to purchase companies whose stock prices are about to skyrocket on account of excellent quarterly results. Whatever the case may be, you stand to gain a lot by trading during the earnings season.

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.