Earnings calls offer investors a unique window into a publicly traded company’s performance, financial health, and outlook for the upcoming quarters. During these quarterly events, company executives speak directly to investors and analysts, providing context beyond what’s presented in financial statements. Because the information shared can move stock prices dramatically, earnings calls often attract significant attention from traders seeking short-term opportunities.
Yet, purchasing shares just before an earnings call is not a decision to take lightly. Understanding the risks, potential rewards, and strategic implications is crucial for any investor considering this approach.
Key Takeaways
Retail investors frequently increase stock purchases ahead of earnings calls.
Such strategies carry high risk due to unpredictable market reactions.
Stocks often experience heightened volatility around earnings announcements, leading to potential losses for short-term traders.
Long-term investment approaches generally offer more stability than trading around earnings.
Why Investors Buy Before Earnings Calls
Some investors purchase shares just before an earnings call if they anticipate that a company will exceed market expectations. The rationale is straightforward: strong earnings reports can trigger a surge in stock price, offering an opportunity for quick gains. Investors often rely on market signals, analyst predictions, or past performance trends to guide these decisions.
For instance, if a company has consistently reported rising profits or beating analyst expectations, traders may speculate that the trend will continue. In essence, they are trying to ride the momentum created by positive sentiment or news expectations.
However, this strategy inherently involves forecasting the future. If the company fails to exceed expectations—or even merely meets them—the stock price can drop suddenly, leading to potential losses.
A November 2024 study in the Journal of Behavioral Finance observed that retail investors using Robinhood often increase their stock holdings in the hours or days leading up to earnings calls. Researchers noted, “Immediately around earnings announcements, Robinhood investors’ behavior is primarily driven by attention-induced noise trading.”
Other studies have confirmed that these trading patterns are usually short-term and attention-driven, rather than based on detailed analysis or strategic planning.
Pros and Cons of Buying Shares Before Earnings Calls
Advantages
Potential Gains from Positive Surprises: If a company exceeds earnings expectations, pre-announcement positioning can generate quick profits.
Benefit from Pre-Earnings Momentum: Investors can ride the upward trend generated by market anticipation.
Early Positioning: Buying before an announcement can allow you to capitalize on favorable news before the broader market reacts.
Risks
Disappointing Earnings or Guidance: Any misalignment with expectations can cause rapid declines in stock value.
High Volatility: Earnings periods are often characterized by sudden price swings.
Limited Time for Analysis: Investors may have insufficient time to fully digest new information revealed during the call.
Emotional Decisions: The pressure and hype surrounding earnings can lead to impulsive trading choices.
Research supports these cautions. A 2024 study showed that Robinhood traders often “swarm into stocks with pending earnings announcements and lose interest immediately afterward.” Similarly, herding behavior—when a large number of traders pile into a stock at the same time—has been linked to negative returns shortly after the earnings announcement.
Important Considerations
Earnings announcements typically trigger heightened volatility.
Short-term return reversals are common immediately following earnings calls.
Even experienced traders find it challenging to consistently profit from trading based on earnings news.
The Bottom Line
Buying shares ahead of an earnings call can be tempting, but it is a high-risk strategy suited mostly for investors who can handle volatility and react quickly to market changes. For most individuals, focusing on long-term investment strategies—grounded in company fundamentals, diversification, and careful research—is a safer and more reliable path to wealth accumulation.
If you choose to trade around earnings, study the company’s historical earnings patterns, monitor risk closely, and remain prepared for unexpected outcomes. Remember: even seasoned traders cannot reliably predict stock price movements based solely on headline-driven news.
FAQ:
1. Is it safe to buy stock before an earnings call?
No. While potential gains exist, the strategy carries high risk due to unpredictable market reactions and volatility.
2. Why do some investors buy shares before earnings announcements?
They hope to benefit from stock price momentum if the company exceeds expectations.
3. Can retail investors make money consistently trading earnings calls?
Consistently profiting is difficult; studies show that many retail traders experience losses in short-term earnings strategies.
4. What is herding behavior in stock trading?
Herding occurs when many investors simultaneously buy the same stock, often leading to temporary price spikes followed by declines.
5. Are long-term investments better than trading around earnings calls?
Generally, yes. Long-term strategies reduce risk and rely on fundamentals rather than short-term market noise.
6. How can I manage risk if trading around earnings?
Monitor historical earnings trends, use stop-loss orders, and avoid emotional trading.
7. Do earnings calls always affect stock prices?
Not always. While they can trigger volatility, the impact depends on how results compare to market expectations.
8. What should beginners focus on instead of earnings trading?
Prioritize diversified portfolios, fundamental analysis, and long-term financial goals.