Earnings
Earnings are a company's profit for a period; listed companies publish them in regular earnings reports that can move the share price sharply.
Several times a year, listed companies publish their results: revenue, profit, and often guidance for the months ahead. These earnings reports are among the biggest scheduled events for a stock. Prices can jump or fall 10% or more overnight — sometimes in the opposite direction to what the headline numbers seem to suggest, because markets trade on expectations. This entry explains what is in an earnings report, why prices react the way they do, and how traders manage the risk.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Earnings report, Quarterly results, Earnings call
- Updated
Earnings in plain words
Earnings are what a company made after its costs.1 Public companies report them regularly — in the US, every quarter — together with revenue and other figures. See Revenue and Earnings per Share.
Before each report, analysts publish estimates. The stock’s reaction depends mostly on how the results and the company’s outlook compare with those expectations — the earnings surprise. See Earnings Surprise and Guidance.
How to approach an earnings report, step by step
Know the date
Check the earnings calendar; reports usually come before the open or after the close.2 See Earnings Season.
Know the expectations
Consensus estimates for earnings per share and revenue, and what the company guided last time.
Check the implied move
Option prices imply how far the market expects the stock to move. See Implied Volatility.
Decide whether to hold through it
Holding means accepting a gap that can jump straight over your stop. See Gap Risk.
Read beyond the headline
Guidance, margins and comments on the call often matter more than the earnings figure itself.
Trade the reaction, not the guess
Many traders wait for the first session after the report and trade the price action. See Price Gap.
Worked examples
Example 1 — Beat but falls
GuidanceAnalysts expect earnings per share of $1.20. The company reports $1.28, but cuts its guidance for next quarter. The stock falls 9%.
| Earnings vs. estimate | +$0.08 beat |
| Guidance | Lowered |
| Reaction | −9% |
Markets look forward. A weaker outlook can outweigh a strong quarter.
Example 2 — The gap through a stop
GapA trader holds 200 shares at $60 with a stop at $57 into earnings. The stock opens at $51.
| Planned loss | 200 × $3 = $600 |
| Actual loss | 200 × $9 = $1,800 |
Stops cannot protect against overnight gaps. Reduce size before earnings or close the position. See Stop Loss.
Example 3 — Sizing for the event
SizingOptions imply a ±8% move on a $100 stock. A trader willing to lose $500 if the worst plausible gap happens sizes for a $12 gap (1.5 × the implied move).
| Shares | $500 ÷ $12 ≈ 41 |
Sizing for the gap, not for the stop, keeps earnings risk within plan.
Earnings often cause gaps
What moves a stock on earnings
| Aspect | Typical effect |
|---|---|
| Beat and raised guidance | Often positive |
| Beat but lowered guidance | Often negative |
| Miss but raised guidance | Mixed; outlook can dominate |
| In line, as expected | Often small move — or a fall if more was hoped for |
Why traders watch earnings
Risk management
Earnings are the biggest scheduled gap risk for many stocks.
Catalysts
Strong reports can start new trends. See Catalyst.
Volatility trading
Options traders trade the change in implied volatility around reports.
Fundamental tracking
Earnings trends drive valuation over time.3 See Price-to-Earnings Ratio.
Advantages and disadvantages
Advantages
- Scheduled: you know when the risk arrives.
- Can start strong, sustained moves.
- Provides real information about the business.
Disadvantages
- Large overnight gaps can bypass stops.
- Reactions depend on expectations and can seem illogical.
- Option premiums are expensive before reports.
- Headline numbers can be misleading without the details.
Going deeper
Read as far as you need. Each level builds on the one before it.
It is about expectations
Beginner
A good report that was already expected may produce no rally at all. What matters is the surprise relative to expectations.
Post-earnings drift
Intermediate
After strong surprises, some stocks keep drifting in the direction of the reaction for days or weeks. It is a documented tendency, not a rule, and varies across markets and periods.
Adjusted vs. reported earnings
Advanced
Companies often highlight adjusted (non-GAAP) earnings that exclude certain costs. Compare like with like: analysts’ estimates usually refer to a specific measure. See Net Income.
Common mistakes
Holding full size by accident
Know every report date for your positions.
Trusting stops through earnings
Gaps fill stops far away from their price.
Reacting to the headline only
Read guidance and margins too.
Buying expensive options before the report
Implied volatility often collapses afterwards. See Implied Volatility.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Earnings reports are major scheduled events for a stock.
- Reactions depend on results and guidance versus expectations.
- Overnight gaps can bypass stops — size for the gap.
- Option premiums usually rise before and fall after reports.
- Read beyond the headline figure.
Frequently asked questions
Why did the stock fall after good earnings?
Should I hold a position through earnings?
When are earnings released?
Further learning
- Price Gap
What earnings often do to a chart.
- Implied Volatility
How options price earnings risk.
- Position Sizing
Sizing for event risk.
- Market Capitalisation
How earnings relate to a company’s value.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Earnings Per Share (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Extended-Hours Trading: Investor Bulletin (opens in a new tab) Checked .
- Investor.gov (SEC). Price-Earnings (P/E) Ratio (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.