Account Info
Log Out
Log in to access Online Inquiry
How Earnings Affect Stock Price?
Views 59KContents 223
joined discussion01/02/2022 14:22

Earnings Trade Expectations

Sometimes companies paint a rosier picture of their financial position than is true. Inflating financial statements and misleading investors can get companies into trouble
Capital markets are normally considered to be efficient when prices reflect all the available information. However, there are instances when this information takes several weeks to be incorporated into share prices. This leads to investors' making uninformed investment strategies on whether to hold or dispose shares thus unable to maximize returns.
In the long run, investing in stocks is like investing in the economy. In the long run, the economy is expected to grow , hence stock prices are expected to go up.
Now in theory: the price of any financial instrument is equal to the net present value today of all the future cash flows from the instrument.
So if company's earnings improve, shareholders hope that the earnings will trickle down to them either in form of dividends or in form of capital gain. So they buy the stock, creating demand for it.
the stock market is not there for speculation on corporate memorabilia. At its base, it is there for investing in a business, the point of the investment being, of course, to make money. A (successful) business earns money, and that makes it valuable to its owners since that money can be distributed to them. Shares of stock are pieces of business ownership, and so are valuable.
There are two issues that limit the effect of earnings announcements on price. One is that the earnings are largely priced in before they're announced. 
Anther issue is that earnings are important not only in themselves, but what the portend for the future. If the earnings announcement is $1 more than the market was expecting, then that in itself should cause the price to go up $1. But if the market believes that the increased earnings is evidence for earnings to continue to be strong in the future, the price will go up more than $1. What the market thinks of the future can easily be a larger factor in price than just the earnings in themselves.
---------------------------------------------------------------------------Thanks For Reading
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only. Read more
Sign in to post a comment