How to Trade Earnings with CFDs: an In-Depth Guide
Welcome to our guide on earnings season: a period renowned in trading circles for its increased risk, volatility, and crucially, opportunity.
Earnings are reported every quarter, making them a permanent economic staple of the trading calendar with undeniable significance. This article will help you understand everything you need to know to take advantage of these key economic events.
What are Stock CFDs?
CFDs are financial derivatives that allow traders to speculate on price movements without owning the underlying asset. Therefore, stock CFDs allow traders to speculate on the share price of a company without owning any underlying stock.
See our full range of stock CFDs
Why Trade Stock CFDs?
The numerous benefits of trading shares as CFDs include:
- Ability to use leverage
- Go long or short – profit from both rising and falling prices
- Trade on the go with your Eightcap account in the TradingView app
- Trading cost can be lower than trading underlying shares
- Hedge your position by taking up a second trade to cover your initial one
Introduction to Earnings Reports
Earnings reports, which are essential filings, showcase a company’s quarterly financial performance. They typically include a press release and a conference call offering insights and future projections. These reports are crucial for traders as they can significantly impact stock prices.
Different Types of Earnings Reports
Earnings are disclosed quarterly. The fourth-quarter report typically includes an annual overview, which is crucial for evaluating a company’s longer-term strategy.
Earnings Report Dates
Earnings dates vary and may not align with the calendar year. For example, a fiscal Q1 report ending in October 2020 differs from the calendar Q1. These reports are pivotal for short-term traders, offering opportunities for potential profit but also potential risks.
Analyzing Earnings Reports: Key Factors
Revenue: Sales made in the quarter, also called the ‘top line.’
Profit: Money earned after deducting expenses, with three types: gross, operating, and net profit.
GAAP vs Non-GAAP: Accounting standards that differ in expense recording, impacting reported earnings.
Earnings Per Share (EPS): Net profits divided by outstanding shares, a crucial metric for performance analysis and quick measure of profitability.
Cash Flow: The net movement of cash, essential for understanding a company’s fiscal health and solvency.
Year-over-Year Growth: Comparison of quarterly performance with the same quarter in the previous year.
Five Tips for Trading Earnings
- Stay Disciplined: Avoid impulsive trades; market reactions can be unpredictable.
- Understand the Impact: Strong or weak earnings can lead to significant stock price movements, which can take uninformed traders by surprise.
- Trade Responsively: Focus on market reactions rather than predicting outcomes.
- Research Thoroughly: Understand company forecasts and market trends before making a single trade.
- Adapt to Market Reactions: Flexibility is crucial for successful earnings trading; if a strategy is not working, don’t be afraid to make a change.
Understanding your Earnings Trading Strategy
Pre-Trade: Research and Preparation
Gather information about companies and their expected performance. Use Eightcap’s Trade Zone and Economic Calendar to stay informed about market trends.
During the Trade: Precision and Control
Implement strict stop-loss orders. Be alert to market responses and adjust your strategy as needed.
Post-Trade: Analysis and Adaptation
Reflect on your trades, learn from successes and mistakes, and refine your strategy for future trading. Eightcap Labs is always a great place to evaluate and improve.
FAQs: Trading Earnings Simplified
What are earnings reports?
Quarterly financial summaries required reflecting a company’s performance.
How do earnings reports affect stock prices?
They can cause significant price movements due to investor reactions to financial performance.
What should I watch for in an earnings report?
Focus on revenue, profits, EPS, cash flow, and year-over-year growth.
How should I trade during earnings season?
Consider trading with caution, adjusting position sizes, and being ready to adapt to potentially rapid market reactions.
Is it risky to trade on earnings reports?
Yes, due to potential volatility and unpredictable market reactions.
How can Eightcap help me during earnings season?
Eightcap provides valuable insights and tools to help navigate earnings season more effectively. Plus, our award-winning support team is always on hand to answer your questions.