When you buy stock in a company, you become a part-owner of that company. While you don't gain any direct operational control, you do get right to attend the company's annual stockholder's meeting and vote for members of the board of directors, who actually control how the company is run. The board is responsible for such things as determining whether to pay dividends to shareholders and when to release quarterly earnings announcements, which can affect the company's stock price.
While individual investors trade stocks for a variety of reasons, the market as a whole typically takes a forward-looking approach to stocks -- and market prices tend to adjust accordingly. Analysts have certain expectations regarding how well a stock will perform for the upcoming quarter, and institutional investors tend to build that information into their stock purchasing decisions. As long as a company's earnings track with expectations, earnings announcements should have little impact on the stock's market price.
Earnings projections are best-guess estimates based on information available at the time the projection is made. A company's actual earnings for the quarter can vary significantly from earlier projections. If the company reports earnings that are significantly higher than projected, its stock price tends to rise. If the company reports earnings that are significantly below projections, its stock price tends to fall.
Stock price movements following a earnings announcement can feel counter-intuitive. You might expect a company that announced earnings of $2.25 per share to increase in value. But if analysts had projected earnings of $3 per share, the stock's price will likely fall because the earnings failed to meet expectations. Likewise, the stock of a company that lost $1 per share might increase if the company had been projected to lose $2 per share.
Like a lot of other things in life, timing is everything when it comes to buying stocks. The Securities and Exchange Commission requires companies to report their earnings within 40 days of the end of the fiscal quarter. Stock prices of companies that release their earnings reports earlier than expected tend to increase, while stock prices of companies that delay releasing their earnings reports tend to decline. Companies with bad earnings news tend to release that information during the weekend or near the end of the week, while those with good earnings reports tend to make their announcements earlier in the week.
- The National Bureau of Economic Research: Stocks Rise Around Earnings Announcements
- Securities and Exchange Commission: Beginners' Guide to Financial Statements
- American Association of Individual Investors: Earnings Estimates and Their Impact on Stock Prices
- Tilburg University: Investors Distraction, Earnings Announcements and Stock Prices: A Temporal Analysis
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