Researching Earnings Announcements Before You Trade

Learning to research earnings announcements and key news releases before you place any trades is an important step to take before opening any position.

Not only are the news and announcements themselves important, but knowing the potential or actual dates they are supposed to be released should be looked into.

Looking up a particular stock symbol an websites such as Yahoo Finance, Google Finance and others, you will be able to look through recent news releases and get some insight into possible upcoming news events.

You can then look for their upcoming earnings release dates as well as expected earnings and previous earnings history. For general research on upcomings earnings, you can follow an Earnings Calendar such as the one on Yahoo Finance.

Looking at the general Earnings Calendar you can scan upcoming releases for stocks that may also effect particular ones you may be interested in such as ones in the same sector.

Of importance to understand for the purpose of this article is that the closer you decide to open a position in a stock to Earnings announcements, the higher the risk of a volatile move for or against you. This is due to the natural increased volatility that often occurs up to and through the initial announcement.

Unless you enjoy higher risk and have a strong stomach, if it is close to an event or announcement, most people will be better off waiting until after the news is released and then deciding whether or not to enter a trade or not. Yes, you may miss out on a big move, but the move could very well be against your position just as easily as for your position.

Here is a great example of what could happen: I recently received news of a newsletter recommending to Buy MELI (Mercadolibre, Inc.) on Wednesday May 6, 2009 during the morning hours. It closed the day at $28.67. If you would have taken a look for upcoming events, you would have seen the earnings announcement was due out that same day, after the market closed.

Take a look at the chart below. The next day the stock went down about 19% and closed at $23.58 based on the Earnings announcement. Two days later, after another volatile day, the stock only went back up 3% to close at $24.29. That's a big move that went against everyone who bought in based on someones high risk recommendation right before a major company event.

The takeaway here is to spend a little time and do some research so you don't get caught in a trade or investment like this that could go against you by a large amount right from the start.

Yes, this stock could have moved 19% in your favor, but entering a new position right before a major event or earnings announcements such as this is much riskier than if you would have waited until after the announcement. After all, the reasons this stock was recommended in the first place could very well still be in place, only the entry price now would be much more favorable.

Return From "Earnings Announcements" To "Stock Market Research"