What Are Earnings, and How Do You Trade During Earnings Season?

Earnings season is a term every trader, investor, analyst, and even the average consumer should be familiar with. This is because earnings can provide valuable insight into both the state of the stock market and the global economy, hence causing market volatility and affecting trading and monetary policies. 

But what is earnings season exactly, what do earnings reports reveal, and how can traders and investors trade during earnings season? Here’s what you need to know:

TL;DR

• Earnings season is a period when publicly traded companies release quarterly financial reports, impacting stock markets. It lasts several weeks and occurs at the end of each fiscal quarter.

• Earnings show a company's revenue, expenses, profit margins, earnings per share (EPS), and guidance.

Earnings reports can cause stock price fluctuations, impacting market sentiment.

What Is Earnings Season?

Earnings season is an unofficial timeframe during which many publicly traded companies release their quarterly earnings reports at the end of each fiscal quarter. It lasts several weeks.

What Are Earnings Reports?

An earnings report is a financial disclosure released by publicly traded companies. It offers detailed information on their financial performance over a specified period (usually quarterly).

What Do Earnings Reports Measure?

Earnings reports include updates on a company’s revenue, profit margins, net income, expenses, earnings per share (EPS), and guidance among other measurements. 

Here’s what some of the main segments included in earnings reports mean:

• Revenue: The overall financial inflow resulting from a company's operational activities, quantified over a specific duration of time.

• Expenses: The expenditures that the company faces to sustain its operations, encompassing operating expenses, cost of goods sold, and other miscellaneous costs.

• Profit Margins: The proportion of revenue that translates into profit once all the business-related expenses have been subtracted.

• Earnings Per Share (EPS): The profit a company has generated per outstanding share of its common stock. You can read more about EPS in our “Earnings Per Share (EPS)" article.

• Guidance: The company's publicly disclosed forecasts and projections for its earnings in the current quarter and future periods.

• Net Income: The company's ultimate profitability is determined once all expenses and costs have been subtracted from its total revenue.

When Do Earnings Reports Get Published?

Most publicly traded companies follow the standard calendar, with the ends of their financial quarters coming at the end of March, June, September, and December. Approximately one week to ten days later, the companies release their reports.

What to Consider During Earnings Season

Earnings season can act as a double-edged sword. While earnings season can have the potential to shift the trend of an entire sector, sometimes it can have little effect on the company’s shares. For example, even if an entire sector dips during earnings season, that does not necessarily mean that the shares of a company you are following will dip. Nonetheless, there are a few aspects you can take into consideration when trading during earnings season.

Companies’ News and Recent Updates

Before deciding to trade on a particular share, traders may review recent news surrounding the company. Was there a recent press release during the quarter? Were there any upticks in positive reporting? Did the company have any scandals that may affect its reputation?

These can all give some ideas about what the upcoming report may say. You can also keep track of some of the major market news when trading during Earnings Season through Plus500’s free News & Market Insights articles.

Historical data

Looking at a share's price movements from the previous year, half, and quarter may give insight into how traders will react to whatever the upcoming earnings report says. If a year before, a company’s earnings report showed growth but its price dipped anyway, you can attempt to find the reasoning behind this. If a company’s revenue decreased but its share prices rose, you can find out why traders felt optimistic.

Past performance is not indicative of future performance.

Expect the Unexpected

While the aforementioned factors can be considered during earnings season, you should still expect the unexpected when it comes to the market, which is known for its volatility. (Source: DailyFX)

What Are Earnings Calls?

During earnings season, publicly traded companies host “earnings calls” where the public (investors, traders, and analysts) can listen to the companies' financial data and statements. Publicly traded companies host conferences where the public (investors, traders, and analysts) can join in and listen to the companies' financial data and statements. These conferences are called “Earnings Calls.”

Why Are Earnings Reports Important to Traders and Investors?

Earnings reports are important to traders, investors, and analysts as they can provide valuable information about companies and how they have fared in the quarters in question. Here are some of the reasons why earnings season should interest market participants:

• Earnings reflect a company’s health: One of the main reasons earnings are considered important is that they reflect a company’s financial health. In other words, they show how well or badly a company has performed. This may be especially interesting for traders and investors who want to benefit from a company’s stock price swings. This also means that earnings can have a direct effect on investors' and traders’ decisions, which would, in turn, affect the company’s stock performance. 

• It affects stakeholders’ net income: Since companies’ dividends are distributed to shareholders in accordance with their net income, if a company reports below-average earnings, it can also affect stakeholders’ profits and equity. 

• It can lead to market volatility: Earnings reports can send ripples across the markets and cause volatility, which, in turn, can affect both the stock market and the economy. 

• It can affect market analysis: Earnings serve as important data points for analysts as they can use it to assess a company’s performance in the past and future. 

Trading During Earnings Season

For those interested in trading during Earnings Season, here are some basic aspects that should be kept in mind:

Choosing Companies

The first step to developing a trading strategy during Earnings Season is narrowing down the number or range of potential companies to research. This search can begin by reviewing companies within a particular sector of interest, based on which companies have caught your attention while trading between Earnings Seasons.

Checking the news regularly before the beginning of the earnings season will help traders keep up-to-date on global politics, acquisitions, and potential IPOs. If traders begin reading headlines in January in preparation for April earnings, they will have better insight into various market factors that may potentially be difficult to digest, with only a week to go before the earnings season. In addition, traders may also want to keep track of any upcoming events that can potentially affect earnings. As such, they can refer to Plus500’s free economic calendar feature to see some of the main events that can potentially shift the markets.

Researching

Once you have chosen companies whose shares you wish to trade, what are their key revenue sources? Is their most popular revenue source also the most profitable? 

For example, Disney (DIS) is well known for its parks and theatrical releases, yet in 2020, Disney+, its online TV and movie streaming service, surpassed expectations with 73 million paying subscribers. While people may not have thought of streaming when thinking of Disney, it has proven to be a vital revenue stream due to higher subscriptions and views brought about by the COVID-19 lockdowns. 

In 2021, Disney+ surpassed that subscription rate by reaching about 118 million subscribers. However, despite that ostensible increase in subscriptions, the company reported disappointing Q4 earnings for 2021. People slowly returned to their normal lives in response to COVID restrictions being lifted. Accordingly, this turnaround only highlights the fact that share prices can be volatile and unpredictable despite past earnings.

Moreover, it may also be worth tracking analyst expectations regarding a company’s possible price trajectory. Whether you agree or disagree with the forecast, it may impact the company positively if it exceeds expectations or negatively if it falls short, regardless of its actual earnings. 

For example, a trader may speculate that a company’s revenue stream presents an opportunity for the share price to rise, so they may open a ‘Buy’ position to benefit from a potential uptrend. On the other hand, they may speculate that this revenue stream is not sufficient and the buzz around the shares will soon fade. This may lead them to open a ‘Sell’ position, which will potentially allow them to benefit from a falling share price. This is important as both of these positions can have inherent risk, should a position move in a direction that is not favourable to the trader. 

Strategising

Once you have done your research, you can pick a strategy and stick to it. When entering a trade that clearly moves in your direction, it is easy to ride it until you see a clear indicator to sell, but this rarely happens. Following earnings releases, share prices have the potential to move higher and lower throughout the day. During these volatile periods, it may be challenging to take a step back and see the big picture.

Accordingly, you may want to consider when you want to enter and when you want to exit. Which numbers are you looking for and what is your ceiling? Consider how much risk you are willing to take on and what the whole strategy will be, all before entering a trade.

Conclusion

Regardless of how or what you trade, earnings season holds the potential for market volatility, and trading shares CFDs with Plus500 can allow you to potentially benefit from stocks during this substantial time. Plus500’s free and helpful tools, such as News & Market Insights, indicators, risk management tools, and +Insights data, as well as the free Trading Academy materials, can help you make clearer choices both before opening trades and while they are active.