When you’re first getting started in the stock market, all the terminology you must learn may feel overwhelming. You may want to just dive into investing in Apple or Tesla, but learning about the stock market and how Wall Street works is important to help you understand what risks you face.
One of the terms that commonly pops up four times each year is “earnings season.” Earnings season isn’t like the four weather-related seasons of the year. Although they do occur four times each year, each earnings season lasts only for a few weeks. During this time, companies report a great wealth of information that should interest you if you invest in their stocks or are considering investing.
Learning what information companies provide during earnings season and how to use it can help you formulate an investing game plan. Here’s what you need to know about earnings season so you can prepare for the next one and take your next step in becoming a savvier investor.
What is earnings season?
Due to Securities and Exchange Commission regulations, earnings releases for public companies tend to fall in roughly the same period after each quarter ends. Earnings season itself is a term coined by investors, though. It represents the period when most public companies release their required quarterly or annual financial reports.
Publicly traded companies are companies that have shares of stock that trade on a stock exchange publicly. They may be listed on an exchange like the New York Stock Exchange (NYSE) or Nasdaq, and anyone can buy shares in these companies. These companies are required to provide critical financial information in both quarterly and annual reports to all shareholders. These reports include financial statements that show a company’s income, expenses, assets, debts, cash flows, and more.
The financial statements also share disclosures about risks facing the company and any changes to how the company reports its financials. Management of the company usually includes comments about the financial results during the quarter or the year, as well.
Publicly traded companies must share earnings results to inform their shareholders about the state of the company. This way shareholders can hold management and the company accountable for their actions. The same rules don’t govern privately held companies. As such, private companies do not have to share earnings information with the public.
After earnings reports are released, many companies hold an earnings conference call. On this call, management typically explains the earnings report. They share their future outlook of the company and may take questions from stock market analysts and investors.
Anyone can call into an earnings call to listen. The company gets to pick and choose which questions they answer during the Q&A section, if they answer any at all. They may take questions from analysts but not individual investors or they could decline to answer certain questions altogether. Due to the high volume of listeners on a call, most individuals do not get called on to ask questions.
Why is earnings season important?
When you’re learning how to invest money, understanding the importance of earnings season should be a priority.
Earnings season tends to have more significance for investors that trade in individual stocks. Earnings reports could help investors decide how to handle the stock they hold based on the company’s financial performance over the prior quarter. Both positive and negative earnings announcements could result in a variety of potential outcomes.
A company that beats analysts’ earnings estimates and provides a positive outlook could result in more people purchasing stock in the company. These additional purchases could drive up the company’s stock price. However, people with large gains from a company’s stock may see a positive earnings call as an opportunity. They may sell some shares to lock in profit, especially if they believe the company has already reached its peak potential.
People disappointed in the company’s earnings might feel the company cannot improve moving forward. These investors may decide to sell their shares of the company’s stock after a bad earnings call. Other investors might believe a company simply had a bad quarter but still has a bright future. These investors might try to take advantage of a price drop following a bad earnings release to buy more shares of the stock.
Earnings season could also help index investors who invest in large portions of the stock market instead of individual stocks. Index investors likely don’t care about the earnings calls from any particular company. Earnings results as a whole can share information about the direction of the economy, though.
During times of market volatility, certain companies may show signs of improvement that could help signal the end of a downturn. Similarly, some companies may be the first to show signs of a pending pullback. For instance, a decline in demand for boxes from box companies could signal slowing consumer spending. These companies that help signal trends are often called bellwether stocks.
Long-term buy-and-hold investors may not care about earnings season at all. The earnings reports mostly focus on short-term results instead of long-term trends. People who don’t want to attempt to time the market may find their personal time better spent on other tasks.
When is earnings season?
The exact dates of earnings season may vary from quarter to quarter. It usually kicks off about a week or two after a quarter ends and lasts for a few weeks. Some companies may report earnings outside this window. Although the first company to release earnings may change each quarter, American industrial corporation Alcoa has historically been viewed as the kickoff of earnings season.
The earnings calendar looks roughly like this:
- First quarter: Early- to mid-April through mid-May
- Second quarter: Early- to mid-July through mid-August
- Third quarter: Early- to mid-October through mid-November
- Fourth quarter: Early- to mid-January through mid-February
The SEC gives companies more time to release annual earnings reports than their quarterly earnings reports. During a company’s annual reporting quarter, they may report earnings later than in the other quarters.
What you can do with earnings season information
Reports from earnings season can help you create an investing strategy in both the near-term and long-term future. But before you start developing a plan, you must make sure you understand the information presented. If you’ve never read an earnings report before, you probably don’t want your first experience to be a freshly released report during earnings season.
Thankfully, you can quickly find past earnings reports issued by companies by using the SEC’s website. Once you select a company, you can search for prior quarterly earnings reports (10-Qs) and annual earnings reports (10-Ks).
The quarterly reports aren’t as detailed as the annual reports. This can make them easier to start with. Once you understand the quarterly reports, you can dive into the more detailed annuals. The SEC even provides articles detailing how to read a 10-Q and 10-K and how to read the financial statements contained within these documents.
You can use the earnings report information to help determine whether a company could be a good investment for your portfolio. Read through historical reports to understand how executives manage the company and its projected direction. If you feel the company’s future is promising, it could be worth investing in.
If you invest in individual stocks, reading the latest quarterly and annual earnings reports could help you decide what you want to do with those investments going forward. You might want to buy more of the stock if you feel the company is doing well or sell if the company looks like it can’t keep up with the changing world. In some cases, you might decide to hold an investment instead of either buying or selling shares.
Newer investors might get overwhelmed with the massive amount of data disclosed during earnings season. The best investment apps provide alternatives to investing in individual stocks that may be a better fit. Depending on the app you choose, you may be able to choose a predesigned portfolio and also have access to educational materials that can help you become a smarter investor.
What is a good EPS?
The term “earnings per share” represents a company’s profit divided by the total number of its outstanding stock shares. For instance, a company may have a profit of $100 million. If it has 10 million shares of common stock, its EPS would be $10. In general, a good EPS beats the company’s competitors and stock market analysts’ expectations.
Do stocks go up after an earnings call?
A stock’s price may go up, down, or stay the same after an earnings call. If the company has beaten the markets’ expectations, the stock price may increase. The opposite is also generally true. Neither move is guaranteed as other outside forces may also influence a stock’s price.
Why do companies release earnings after the market closes?
Companies may release earnings after the market closes rather than before the market opens in an attempt to garner less attention to less attractive earnings results. Other companies may report earnings on a set schedule every quarter. Some companies report after the market closes to give investors more time to digest complex reports before regular trading opens the next morning.
Earnings season gives investors a quarterly look at the financial performance of the publicly traded companies they invest in. You can use the information you learn from quarterly and annual earnings reports to help you decide which investments you want to buy, hold, or sell. Investors can use this factset to get a feel for the future of the markets as a whole, too.
Even with the data from earnings season, investing is still risky. Some publicly traded companies may face challenges and eventually go bankrupt while others grow rapidly. If you’re investing on margin, which is borrowing money to invest, you could even lose more money than you invest.
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