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Earnings Season Basics

Earnings season represents the time when many companies give a report on their quarterly profits or losses. Thus, this term is often mentioned during the year. The earnings season is characterized by uncertainty. That is why the stock market becomes extremely cautious when this time comes, because it hates uncertainty.

During this time it becomes clear which companies has managed to reach their earnings goals. If a company has successfully achieved its numbers, then its price will increase for the pleasure of its shareholders. On the other hand, if the company has failed, the market is likely to beat the company.

Generally, the numbers for industry leaders are calculated well before the actual reports are issued. If a company that enjoys the status of being a leader in a particular industry fails in meeting its numbers, then the whole industry may suffer the hammering of the market.

In the focus of attention are typically large companies, which market analysts examine closely in order to figure out their earnings using the earnings per share (EPS). The reliability of the analysts' reports is strengthened by the fact that some of them are in close cooperation with the companies they study.

However, some experts question this reliability since they have doubts concerning the objectivity of the analysts' reports that have relationship with the companies.

Earnings Guidelines

Additionally, a management estimate of the future activities of the company under consideration is also provided, which is often referred to as earnings guidelines. However, there are limits to what can be presented in the guidelines in order to avoid misrepresentation and manipulation of investors.

Many experts support the idea of issuing earnings guidelines since it allows investors to see what they can expect from the company. Additionally, it gives a view on the future performance of the company.

Opponents of earnings guidelines point out that this practice allows companies to manipulate the price of their stock. How is this done? The management of the company may present lower values for the future earnings of the company. As a result, after higher earnings are reached than the ones presented in the earnings guideline, the stock price will increase.

A somehow informal way of getting information about the earnings numbers is through the so called whisper estimates. The source of such estimations may be company insiders or a group of investors that has grouped together and agreed upon certain values. Often times it is hard to determine the source of the whisper estimates, so they represent a not very reliable way of determining the numbers.

Earnings Season Investor Importance

If you are a buy and hold investor then you should not be very concerned about the earnings season since its focus is on short-term goals. Earnings season affects the prices over the short term. So, it is important to active traders who may seize different opportunities.

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