Speculating and Spread Betting on Earnings Reports

LONDON, January 24, 2012 /PRNewswire/ --

As the US earnings season continues in full swing, causing the markets to fluctuate in response to company earnings announcements, UK spread betting provider City Index shares insights on how traders could ride short-term trends created by earnings reports for profitable gains.

Whenever a company listed on a major index such as the Dow Jones announces its earnings, there is always a reaction in the market. As a result swing traders will often spread bet on a stock going up or down shortly before a company reports its quarterly earnings.

Speculating on earnings reports is a high risk, high reward style of trading because stocks can rise or fall over 10% in a single day, depending on factors such as whether a company reports good or poor earnings.

The risk is increased even further if you are placing a spread bet on earnings reports. While you only need to deposit a small amount (typically between 1% and 10% of the total value of your trade) to open a spread betting position, movements in the market can not only generate gains when the trade moves in your favour, but can also cause you to incur losses greater than your initial deposit if the trade goes against you.

Financial Spread Betting is different from conventional trading, in that it enables you to profit irrespective of whether the markets are going up or down. So if you believe that a company's earnings report is likely to be poor, it is possible to profit from this speculation as well.

If you believe that a company's share price is going to rise (based on the assumption that the firm will announce a positive earnings report), you buy (go long) and your profits will rise in line with any increase in that price. Similarly, if you expect a company's share price will fall (on the assumption that the company's earnings will disappoint), you can sell (go short) and your profits will rise in line with any fall with that price. Equally, your losses will rise if the market moves against you.

Technical and fundamental analysis can be used to assess the potential success of a speculated position. One way of doing this is by investigating the performance of other stocks in the sector or related sectors. These associates and competitors may have already revealed their earnings report for the quarter, providing further insights into potential share movements.

It is also important to remember that earnings reports from major firms can also have an impact on the overall performance of the sector or index.

For example, Microsoft recently announced quarterly revenue of $20.89 billion for the quarter ended Dec. 31, 2011, a 5% increase from the prior year period. Operating income, net income, and diluted earnings per share for the quarter were $7.99 billion, $6.62 billion, and $0.78 per share, compared with $8.17 billion, $6.63 billion and $0.77 per share, respectively, in the prior year period.

This, coupled with positive results posted by IBM, had a positive impact on the Dow Jones, which closed higher by 96.5 points at 12,720.48 on January 20, 2012 (a gain of 0.8%). Without the gains posted by IBM and Microsoft, the Dow would have risen just 24 points. So it could be prudent to plan for the earnings reports of other leading firms in your chosen sector as well.

Earnings reports usually create fluctuations in company share prices, making the short period before their announcement the subject of much speculation for traders. However, sometimes a company's share price could be volatile based on rumours ahead of the announcement. So it pays to research thoroughly before committing to a spread betting position.

Learn more about the markets with daily news and insights from the City Index trading floor at: http://www.cityindex.co.uk/market-analysis/

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, spread betting.