Should You Buy Stock Before an Earnings Call? Here’s What You Need to Know

Earnings calls provide crucial insights into a publicly traded company’s financial health, performance metrics, and future outlook through management’s direct communication with investors and analysts. These quarterly updates go beyond just the figures printed in financial statements and can create significant stock price movements, making them tempting opportunities for traders.

However, buying stock before these corporate events requires careful consideration and an understanding of the risks involved.

Key Takeaways

• Recent research shows retail investors tend to increase buying before earnings calls.
• The practice carries substantial risks due to unpredictable market reactions.
• Stock prices often show increased volatility around earnings announcements, and retail investors often take losses on short-term earnings-call strategies.
• A long-term investment strategy would likely be safer than earnings-based trading.

Trading Before Earnings Calls: Understanding the Appeal

Investors sometimes buy shares just before an earnings call if they believe the company will beat expectations. In other words, they’re acting on the expectation that a strong earnings report might increase the stock price. This decision often stems from market indicators or analyst forecasts suggesting that a company’s sales or profits have grown more than expected. For some, it’s a strategic attempt to take advantage of any upward momentum taking place due to market expectations of positive news.

However, because this approach attempts to predict the future, it also carries risk: If the company misses—or even merely meets—its targets or suggests a disappointing forecast, the stock’s price could suddenly drop.

According to a November 2024 study published in the Journal of Behavioral Finance, retail investors from the online discount brokerage Robinhood often increase their holdings in the days and hours leading up to earnings announcements, particularly for well-known companies that receive significant media attention. “We find strong evidence that, immediately around earnings announcements, Robinhood investors’ behavior is primarily driven by attention-induced noise trading,” researchers concluded.

Other research has also found that such trading patterns are primarily driven by short-term, attention-based decision-making, rather than informed analysis or strategic timing.

Pros and Cons of Buying Shares Before Earnings Calls

The decision to buy shares before an earnings call comes with distinct advantages and disadvantages.

To the upside, those who correctly anticipate positive earnings surprises may benefit from both pre-announcement momentum and the immediate price jump that could follow better-than-expected results.

However, research has found that attention-driven trading around high-profile events like earnings announcements can lead to suboptimal returns for retail investors. While some well-positioned traders may profit from in-depth technical and fundamental analysis, others face losses, especially when their trading decisions are based primarily on hope or hype.

A 2024 study found that traders on Robinhood “swarm into stocks with pending earnings announcements and lose interest in the same stocks immediately after the announcements.” The authors concluded: “There is little evidence that their trading around earning announcements yield any profits.”

Another study looked at “herding” among Robinhood traders—when the number of users owning a particular stock increases dramatically on a given day, which can occur around earnings announcements. It found “large negative abnormal returns following Robinhood herding episodes.”

Important

Stock prices show increased volatility around earnings announcements, with researchers documenting a “dramatic” increase in short-term return reversals during these periods.

Upsides

• Potential for significant gains if earnings exceed expectations

• Opportunity to benefit from pre-earnings momentum

• Chance to get positioned before positive news

Risks

• Risk of losses if earnings or guidance disappoint

• Increased volatility around announcement periods

• Limited time to analyze new information revealed on call

• Emotional decision-making may cloud short-term judgment

The Bottom Line

While buying shares before an earnings call might seem attractive, it’s generally a high-risk strategy that requires careful consideration. Instead of trying to time earnings surprises, most investors would be better served by focusing on long-term strategies based on thorough research, company fundamentals, and diversification.

For those still interested in trading around earnings, it’s crucial to understand the company’s historical earnings patterns and be able to nimbly manage risk. Remember that even experienced investors find it challenging to consistently profit from headline-related trading strategies.