The stock market is a complex system designed to mutually benefit companies and those who can afford to purchase shares. In general, big companies have publicly traded stocks. The number of shares, price of stocks, and earnings season outcomes are widely available for investors to track.
But what is the link between a company’s earnings season and its stocks? Read on as we define the earnings season in simple terms and discuss its two primary effects.
Defining the earnings season
The earnings season can be confusing for those who are new to stock market investment. Is it the same as a fiscal year? What information is made available?
The majority of companies operate on the same market calendar. This means that their fiscal year is divided into quarters, which end in March, June, September, and December. An earnings season usually begins two to three weeks after each fiscal quarter ends.
During earnings season, companies release detailed information on their financial performance. This includes income statements to show net profit and forecasts for the next quarter. These reports are available on company websites and the Securities and Exchange Commission.
How this affects stock investors
The company goal is to continue growing and to increase profits each quarter. This growth is very attractive for investors, which makes that section of the stock market even more competitive. Have you thought of derivatives such as CFD trading shares? Companies can then raise the price of their stocks and earn additional money.
If the earnings goal isn’t met, does that automatically damage the stock value? The answer is “not necessarily”. There are two types of investors: long-term investors and active investors.
Long-term stockholders hold onto their shares for extended periods of time – at least a year, but often much longer. They aren’t going to be shaken by occasional dips in the value of their investments because they have the money and freedom to take the risk.
On the other hand, active investors buy stocks for the short term. They don’t intend to stick with singular companies unless they perform increasingly well, and companies are quite aware of this. But even when current investors drop out and stock prices take a dip, there’s typically a second string of investors waiting to pounce.
The takeaway
At the end of the day, reports from an earnings season don’t necessarily make or break any company unless something drastic happens. Instead, the season is an opportunity for companies to update their shareholders on the financial health and growth they have experienced over the last three months. It’s also a chance to forecast how the next quarter is going to turn out.
Individual investors can add specific stocks to their portfolio, or drop them from it, depending on the company’s actual profit. But other shareholders are always waiting in the wings to purchase slightly cheaper stocks in big companies. This cyclical nature of the stock market never stops, but earnings season can act as a useful guidepost.