How Do Financial Results Affect Your Trading Decision?

July 18, 2019

Most public companies have actively traded shares. Stock prices represent the value market participants place on a company. The price of a stock is affected by many variables including the underlying financial results.  Public companies generally report their financial results to investors once a quarter, which can potentially alter your trading decisions.

What Are Financial Results?

Every quarter a public company with releasing its financial results to the markets. Financial results describe how much profit a company has made during the most recent 3-months along with revenues, operating expenses, and forecasts. The earnings results describe the profits the company made within the last quarter and are reflected as a total and as earnings per share. The revenue picture shows the total sales and describes how well product turned over. The company will also describe any costs or special gains. They will also tell you the types of business they engage in such as industrial manufacturing or commodity trading.

What is Forward Guidance

Guidance is a very important part of the financial results picture. The guidance describes how the company believes it will perform in the future. Since stock prices capture the discounted value of future cash flows, having an idea of how a company will perform in the future is of utmost importance.

When a company provides guidance, it is matched up versus the estimate of the market of future guidance. Analysts will also provide their forecasts of future performance. If a company increases its guidance, the future value of the company has a positive endorsement. You would expect a company to provide confidence, which is why a negative guidance is so important. If a company does not believe it will perform well, you need to evaluate the circumstances.

Dividend Announcements

A company that provides investors a dividend allows its owners to benefit from holding the company as an asset. A dividend is generally a cash payment, that investors receive. The company calculates the distribution of the dividend based on the number of shares they have outstanding. In addition to regular dividends that are offered to investors quarterly, companies will also issue special dividends to investors on an Adhoc basis. If a company announces that they plan to increase the dividends that it offers its investors, its likely because the company is performing better than forecast and wants to give some of it back to its owners. Dividend announcements generally come immediately following the financial results announcement or during that announcement.

What Happens After Financial Results are Released?

The financial results of a company can generate significant market volatility. Stock prices can surge or tumbled based on the results relative to expectations. If you take a position in a share CFD prior to the announcement of financial results you should expected volatility. You should also understand that many companies release their financial results before and after the markets open. In some cases, the liquidity during these periods is reduced.