Demystifying StocksHow to trade on Quarterly Results?
What is trading on Quarterly Results? Companies that trade shares in the public financial markets are required in most regions to report the amount of profits and revenues generated over a period, usually quarterly, to some regulatory authority.An earnings statement is similar to a report card for acorporations financial health. It reveals how healthy acompany’s balance sheet or financial state is compared withwhat the investment community is expecting. Trading by quarterly results is when you are betting on a stock to go up or down right before a company reports its quarterly earnings.
Importance of Quarterly results Every quarter, companies announce their profits and earnings, other important information, and their guidance for what they expect the next quarters activity to be like. A lot of this happens during earnings season, which is just a fancy term for when a lot of major companies announce their earnings within a few weeks of each other, which often occurs as a new quarter begins. What most people focus on in these lengthy reports is the earnings per share number, which divides the earnings or profits of the company by the number of shares outstanding. This number is commonly described as EPS.
Is it the right approach? If you do it correctly, you can make a lot of money in a few days just by trading earnings results. A stock can go up over 10% in a single day when the company reports good earnings or earnings that beats market expectations. DownsideTrading earnings results is a high risk, highreward style of trading. If you are a beginner orif you are a risk averse investor who cannot Upsidetolerate a 10% loss on a single day, then youshould not trade on earnings results. Thereason is that sometimes a stock can drop morethan 10% when a company’s earning is belowmarket expectations. This is not to say tradingearnings is not profitable.
How can you trade ahead of earnings result?You can trade ahead of earnings results by buying shares in advance when you expect a companyto announce better than expected results.Though that can be a profitable strategy, look beyond the numbers to see if there is any bigannouncement or unexpected guidance from the company that would change your assessmentof the trade you are about to make.Remember, if you put a position that goes immediately against you, sell out and manage yourrisk.
Strategies for trading on quarterly results • General Stock Market -Is the general market good? Are other companies reporting good earnings? If the answer is no then you should stay away from trading the earnings results.1 • Stocks within the same sectors – Are other stocks in the same sector reporting good earnings? In the case of IT stocks, you will want to check how the whole IT sector is doing. There are companies that this company does business with or competitors that report earnings prior to the target2 company. If they are doing well, chances are that the target company will also do well. • How the stock is doing – You need to do research on the stock itself by reading their balance sheet and analyzing their stock. Are they beating earnings estimate in the previous quarters? Are they3 doing well compared to the other companies in the sector? • Stock Charts – You need to study the general trend of the stock. Is it in an uptrend? Is the chart bullish? If the chart is bullish, there is a good chance that it will continue.4
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