request: how does a company’s stock rise/fall so quickly immediately after earnings?
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Stocks represent ownership in a company. The value of a company is very heavily based on its earnings and profit, so when earnings are released, it can have a large impact on what people think the company is worth.
It’s also worth nothing, that the price will change based on reality vs expectations. Let’s say the expectation is that a company will lose 100 million. The current stock price would reflect those general expectations.
If they announce they only lost 50 million, the stock price would go up, because losing 50 million is good news, when you are expecting to lose 100 million.
Investors in companies can be anything from someone to a Robinhood account to large institutional investor with potentially billions invested.
Earnings in a public company are a closely guarded secret and nobody in the company is allowed to trade based on the information. Companies will give guidance on what they expect for the quarter in terms of revenues, profits, etc.
These companies will have quarterly earnings calls after a fiscal quarter. They explain what the earnings actually were. Everyone gets this information at the same time. Investors will look to immediately buy shares or sell shares depending on how the company does in the earnings call.
A stock sale is made by matching a person willing to sell for at least $x with a person who’s willing to buy for at most $y.
A lot of time, people already have buy orders in for a given price. (“Buy shares or IBM if it ever drops below $90”)
When the earnings report comes out, sometimes people are eager to sell their shares, so they’ll quickly get matched with these people without waiting buy offers.
Earnings day volume can be much much higher than a normal trading day. Think 5x a normal trading day. More shares trading hands means price movement can be bigger.
It doesn’t always. It falls or spikes a if reported earnings are a surprise, either on the upside or the downside. If they’re in line with estimates, share prices don’t move much, typically.
Also sometimes the top line numbers don’t tell the whole story. It’s only after digging into the numbers more, investors can buy or sell heavily. And that takes a bit of time. So you can have earnings released at 4:30 say, after hours trading is flat. But then the next day after digesting the full report the price can bounce or fall 5% because the full report tells a different story than the top line numbers.
Stock prices incorporate investors’ expectations of a company’s future value.
What causes stock prices to move on earnings release is that those expectations change due to new and current information.
Earnings per share (EPS) is one metric that analysts may try to forecast, and if actual EPS is lower or higher than the concensus EPS forecast the stock price will move. EPS isn’t the only information that comes out during earnings release though, and any unexpected information can also move the stock price.
Think of it like this. You own a company that requires zero input from you and generates 10$ a year (low amount but it’s an example), no tricks or anything, no future value of money inflation doesn’t exist. If someone else wanted to buy this company what would be the price? Well you figure with 10 years worth of profit you could invest that 100$ into a lemonade stand and end up earning 20$ in profit so you decide to sell your company for 10 years worth of profit, great deal.
What happens if you know in 5 years your 10$ profit company is actually going to double it’s payout to 20$ which is awesome. That would mean 10 years of profit would be 5*10+5*20 which is 150$ so if I know the future earnings my current price is going to be different. Unfortunately we don’t have crystal balls so we have to make a best guess at the price. I might think the cash flows won’t increase so 150$ is too much for me, someone else might think the cash flows will triple so 150$ is a great price, this is kind of how the market works.
So back to earnings calls. Companies have all these complex models guessing at the future financial position of a company. At the very least earnings calls will provide updated data that will confirm or deny models and provide a new outlook which will immediately change what people are willing to pay.
Often times more important than earnings are future guidance, which is basically the company predicting their cash flows for the future years (quarters). Even if a company earned less than expected this quarter they might have recently announced new contracts and are expecting to make double in a future period. Since the value of a company is multiple years of income, small changes today can have huge impacts on tomorrow thus earnings calls can drastically swing a stock price depending on the info presented
Hedge funds have automated software triggers that keep buying or selling based on certain pre-defined triggers. Some of these can trigger purchases of 100s or millions of dollars impacting how quickly the stock moves up after a positive earnings release. Also large stock brokers like Fidelity, Merrill, Schwab and personal wealth management providers like Betterment, Empower etc are also selling wealthy people subscriptions to such robo advisor based accounts that will automatically adjust holdings in an account daily based on events in stock market. All this can add together to cause huge swings. Basically it’s a bunch of computers trading the stock in an algorithmic way
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