Investing In Shares
And Earnings Season
Earnings indeed play a very important role when investing in shares. In the Basics Section articles, I have introduced you to some earnings ratio and concepts.
I'm sure you want to know why we stress so much on earnings when it comes to investing in shares. Well, that's because companies exist to make money! It's common sense.
If the company makes a lot of money, stock prices go up. If the company losses money, the shares tumble. Just look at the financials like Citigroup and you will know what I mean. If you want more info regarding earnings, take some time to read the earnings articles in the Basics Section.
In this article I would like to stress how important it is for you to be on the alert during earnings season. The reason is...
Big company's earnings result can move the markets
Big mega companies like Google, Apple, IBM, Microsoft, Goldman Sachs and Citigroup have the ability to make or break the stock market. If Google announces a rise in profit which beat expectations, the whole Nasdaq will rise with it.
On the other hand if companies like Citigroup announces a huge loss in their quarterly earnings....Guess what? The entire market can collapse with it. Sometimes, the Dow can gap down by a few hundred points.
The reason why these big companies have such a big influence is they reflect people's expectation of where the economy will be heading. Those who have been investing in shares for a long time are always on the lookout for these special earnings event.
So if there is a solid huge increase in Apple's earnings, people just draw the conclusion that the economy is good or getting better. As a result, the whole market and major indexes like the Dow can jump by a hundred points in just one day.
Lesson: You never know for sure how the market will react to the earnings of big companies. There is no absolute certainty when it comes to investing in shares.
If the Dow jumps a hundred points tommorow on some big company's earnings, it will be good for you if you are long a stock. If you are short a stock, you might be in trouble.
So, if you have a huge trading position, you might want to consider closing your position the day before the big company's earnings come out. This is especially so if your stock lies in the same sector as the big company.
Profit Opportunity: You now know that a big company's earnings can sometimes make the market jump or drop drastically.
So why not try and profit from it? This is what some newsletter advisors do. They will recommend you to buy some options of the stock. I will introduce you to some services that specialises in this.(Coming Soon)
To do this, you need to anticipate the company's earnings and how the market will react to it.
Let's say you expect a certain big company to make a huge loss. If that happens, you guessed that the Dow will gap down by 300 points.
a)Buy a put option on the company's stock with a short expiration date. (Please note that a small company can also jump or drop greatly in price when the earnings are released. Therefore, you can also buy the individual company's option. Regardless of whether it is a big influential company which moves the market or a small company) or;
b)Buy a put option on the Dow Jones ETF(DIA), S&P 500 ETF(SPY) or the Nasdaq ETF(QQQQ) with a short expiration date.
If you expect the market to go up, buy a call option.
Let me tell you that using this strategy can make you huge gains. Sometimes from 100% to 1000%. However, this strategy can be quite risky if you do not have good Money Management
If you are greedy and put in your entire trading capital, hoping to make a killing...Well, that is really risky!!! The best way is to use money that you are willing and can afford to lose to purchase those options.
Hope this will give you a fresh insight on how to protect yourself and make some profits during earnings season. Remember, this is quite a risky strategy. You will need to have good money management if you want to try this.
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