Earnings calls are critical moments for publicly traded companies, serving as a platform for management to engage directly with investors and analysts, offering insights into the company’s financial health, performance metrics, and future prospects. Consequently, these meetings often trigger significant stock price movements, offering tempting prospects for traders. However, buying stocks before these corporate events demands a thorough understanding of the risks.
Some investors engage in the practice of buying shares right before an earnings call with the expectation that the company will surpass predictions, leading to an upwards price movement. This strategy often leverages market indicators and analyst forecasts that suggest a company’s sales or profits have exceeded expectations. However, this approach carries inherent risks: if the company fails to hit or just meets its targets, or provides a disappointing outlook, the stock's price could tumble.
Research, like a November 2024 study published in the Journal of Behavioral Finance, reveals that retail investors on platforms such as Robinhood frequently increase their shareholdings just before earnings announcements, particularly for high-profile companies. However, these trading patterns appear to be driven more by short-term, attention-grabbing decision-making as opposed to informed analysis or strategic timing.
Indeed, the decision to buy shares preceding an earnings call has its own set of pros and cons. On one hand, accurate anticipation of positive earnings surprises could result in gains both from pre-announcement momentum and the immediate price boost from better-than-expected results. Conversely, a study in 2024 found that attention-driven trading around prominent events like earnings announcements often resulted in suboptimal returns, with losses experienced especially when decisions were made primarily on speculation or hype.
Moreover, an examination of "herding" among Robinhood traders discovered "large negative abnormal returns following Robinhood herding episodes." Stock prices also exhibited increased volatility around earnings announcements, with notable increases in short-term return reversal during these times.
Despite the potential advantages, buying shares before an earnings call is innately a high-risk strategy that demands careful analysis. For most investors, a focus on long-term strategies founded on comprehensive research, a solid understanding of company fundamentals, and diversification is more beneficial. If still interested in trading around earnings, a solid understanding of the company's historical earnings patterns and effective risk management are key.