What are earnings?
Earnings occur when a company releases its quarterly news, such as its profit margins or profit targets, to the general public. This new buzz and excitement attracts new investors to come in because it shows how well the company is doing.
You can find earnings information on many different websites – they are public records.
Why are so many people attracted to playing during earnings?
If the company did very well, it could jump quite a bit due to the earnings news and you can make a few thousand dollars very quickly.
On the other hand, you can also lose a few thousand dollars very quickly, depending on how the company did or when the stock moves down.
Let’s look at Chipotle as an example:
You held 100 shares through earnings (you owned the stock before the quarter ended). After the earnings reports came out, the stock jumped over 40 points! If you sold then, you could make $4,000!
Sounds attractive, right?
Of course it does! The problem is, you never know when the stock is going to go up or down during earnings. After all, a stock could have phenomenal earnings and still go down after earnings because so many people are selling off to make that money.
Trading during earnings is like gambling. Most of the time, I would recommend that you don’t trade during earnings.
A better route
- Exit 100% of your position before earnings come out
- The next day after the release if it looks good, you can enter lightly
- If and only if, the stock is moving and behaving properly, then buy some more
Let’s look back at Chipotle…
We had a 30-point gain on the first day after earnings. If you had entered lightly using the above plan, you could have made some great money.
The point here isn’t how many shares you have or end up buying. The point is to understand the system. You want to focus and learn more about how to trade properly through and during earnings.
Even if you only bought 10 shares on the first day after Chipotle’s earnings report, you could have made $300 during that 30-point run. It’s smaller, but it is the better and safer way to trade during earnings.