Earnings represent the underlying profitability of a company. Traders and investors examine earnings to determine how a company makes money. Earnings reports occur quarterly and yearly.
A single earnings report can bring volatility, volume, and interest to an asset. Reports usually occur before the market opens or after the market closes. An earnings report can quickly change the perception of a company depending on a number of factors including profits, losses, analyst expectations, conference calls, and forward looking guidance. If a company exceeds expectations, shows underlying profitability or a clear path toward growth, the asset price will generally move higher. If a company disappoints and misses expectations or reports something that is concerning to the long-term profitability of the company, the asset price will generally go lower.
It is important to remember that sometimes an earnings report is misunderstood and the market’s initial reaction can be wrong. For example, a stock will drop fast after earnings and then rise the next day after investors have had time to analyze the full report. The analysis, investment management, and trading strategies that surround earnings are a popular discussion topic and are a staple of equity markets.