Tips on Trading on Quarterly Results

August 23, 2012   ·   0 Comments

 

It is common to see the stock prices rise or fall by a huge percentage after the roll out of the quarterly earnings results. The quarterly results, released every 3 months, manifest a company’s performance. If you remember how your school report card used to exemplify your performance for a fixed period, similarly, earnings report illustrates a company’s performance for a period of 3 months. This release generally creates frenzy paving way for interrogations of CEO’s and inspections of ledgers.

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Quarterly Results -What are they?

A quarterly result is a compulsory document for companies listed on the Stock Exchange that is to be reported to the regulatory authority, with information regarding amount of profit revenues during this period. They also contain financial statements, crucial discussions from the management and other significant events in the company over a period of 3 months generally.
There are different regulatory bodies in different countries that regulate the business of stock markets and protect the interests of investors over there. In India, it is SEBI (Securities Exchange Board of India), in the US, it is the Securities and Exchange Commission and in the UK, it is the Financial Services Authority.

A quarterly annual balance sheet illustrates the healthiness of the company in comparison to the previous numbers. The key components of the report include EPS (Earnings per Share), net income and quarterly revenue growth or decline depending on the instance. This earning result generally acts as a determining factor for investors to buy or sell these shares. Net Income as a larger cumulative value and earnings per share as a smaller cumulative value serve to be the key metrics enabling one to comprehend the company’s profitability. Revenue growth as top line growth gauges the sales activity of the company. Generally, financial analysts fix an expectation regarding the stock prices. In case, the company meets the expectations or outperforms them, the stock price will rise. On the other hand, the market participants mostly sell shares in case its earnings are below the expectations, lowering the stock price.

 

Quarterly Results- Why are they important?

A quarterly report is an imperative instrument to investors as it renders them necessary information about the performance of the company in a quarter. Without the quarterly report, investors would have had to wait for a year when it may be too late to alter their decision. The quarterly report enables them to take quick decisions and nip the problem in the bud whenever necessary. It is mandatory for a company to reveal these results within 45 days of the quarter end (earnings season).
Besides investors, it also helps the company’s owners comprehend their own performance and take steps accordingly. These results directly affect market sentiments and hence, the earning seasons witness the maximum fluctuations.

 

Trading by quarterly results

With the quarterly results revealing the robustness of the company, there are many who bet the movement of the stock prices before the rollout of the quarterly earnings report. A right foresight based on one’s expertise will enable one to monetize quick returns. When you know the company’s results will outperform the general market expectations, you are in a position to benefit.

 

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Is Trading on Quarterly Results a Sensible Decision?

Trading on quarterly results is as risky as it is beneficial. People with the right insight about the market and capable of assessing the market appropriately can opt for trading on quarterly results. However, it is a complete no- no, for beginners who do not understand market movement and consider the earnings report to be the only means to resort to. Besides, one who cannot tolerate a loss of 10% in a single day must shun from it, as there are chances that a stock can go up or down by 10% in a single day.

 

Trading ahead of Earnings Results

This is where you make your moves based on your beliefs and assumption ahead of the earnings results. You may buy shares of a particular company beforehand predicting the company to outdo the market expectations. On the other hand, you may sell shares of a particular company forecasting the results to be worse than expected.
While the chances of monetizing are high, one must be cautious and quick to sell the stocks if the market does not seem favorable to your decision. Comprehending the risk factor involved and the volatility of the market, one must be prompt and sharp witted to amend one’s move immediately if things seem unfavorable.

 Read: How to pick an IPO?

High Probability Trading Using Earnings Report: What you must know?

High Probability online trading using Earnings Report entails a huge amount of research and study. A sound knowledge background about the market and shares you are keen on investing will trim down the risk factor and amplify your chances of capitalizing.
A few points to be considered:

  • The healthiness of the overall stock market: It is necessary to consider the backdrop of the stock market before investing in it. If most of the companies are reporting losses and the situation seems grim, one must remain cautious at that point of time. This is because the odds of even a good company performing well during adverse market conditions are not very high.
  • Comparing stocks of same sector: Take into your radar other stocks of similar sector and compare the stock you are investing with them. There are times when its counterparts may release an earnings report before the company you are investing rolls out its. This will help you get a better picture and enable you to grapple with the situation in an enhanced way.
  • The background of the company: One must always analyse the history of the company by scouting its previous balance sheets. Besides, scrutinize if the company has succeeded in surpassing the previous earnings estimate. History does tend to repeat itself often.
  • Stock chart: Study different stock charts and their movement, whether it is bullish or bearish. Unless and until something impulsive happens, you have good chances of making profits.

As George Soros says, it is not whether you are right or wrong that is important, but how much money you make when you are right and how much you lose when you are wrong.

Kotak Securities

Kotak Securities is one of India’s leading stock broking firm offering stock trading, mutual fund and IPO investing service’s along with a research division specializing in Sectoral research and Company Specific Equity Research.Express your views on their Facebook Page and Twitter Handle (@KotakSecurities) or you can also browse through their various videos on YouTube and Slide Share.

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