Researching Earnings Announcements Before You Trade

Learning to research earnings announcements as well as key news releases before you place any new trades, is an important step to take prior to opening any new position.

Over time, you'll find that not only are the news and announcements themselves important, but knowing the actual dates they are supposed to be released can prove to be invaluable.

Looking up a particular stock symbol on 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 also look for the company's 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.

By looking at the general Earnings Calendar, you can also scan upcoming releases for stocks that may be in the same sector as on'es you are interested in opening a position in. Often times, same sector stocks on the move will affect the entire sector to which it belongs.

I have found that it is important to understand, and remember, that the closer you decide to open a position in a stock to it's Earnings announcement, the higher the risk of a volatile move for or against you. This includes same sector stocks with announcement releases.

Note: Some people utilize a specific trading strategy that is designed to capture volatile price movements around earnings announcements themselves. In these instances, the same research would be done ahead of time, but not to steer clear of the stocks themselves, but to purposely open positions ahead of time, hoping to profit from directly related directional movement.

Here is a great example of what could happen: I once 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 results released in 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.

Earnings Announcements

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.

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