Penny Stock Ideas
Event Risks in Equities
Trading in stocks can be a very interesting field to people who have observed and mastered the stocks movement over time. Compared to currencies, the only problem many people have with stocks is that they are not traded on a 24-hour basis. They are only traded for about 8 hours. However, for stock traders, this is usually a very interesting market.
There are many factors that cause a stock to move up and down. Investors buy shares of companies that have a promising future. They do this because they expect share capital gains and a dividend. They short companies that they believe are doomed for failure. Therefore, on a daily basis, traders look at the market and interpret the happenings. For instance, if the housing numbers show a strengthening homes market, this could be interpreted to mean that real estate companies and utilities are bound to increase. Then, investors pile their resources in the sector.
Traders benefit more during times of increased volatility. These are periods when there are heightened activities in a certain company.
Different agencies such as Markit conduct research which helps the investors measure the performance of the economy. A strong economy means that Americans are improving their lifestyle. For instance, a decline in the unemployment rate is an indication that more Americans are working. A simple interpretation of this is that when more Americans are employed, they will buy more items. Therefore, companies in the consumer discretionary sector such as Proctor and Gamble (NYSE:PG), Johnson and Johnson (NYSE:JNJ), and Under Armor (NYSE: UA) will see a pop in price.
Another example is when there is a rate increase by the federal open market commission (FOMC). An increase in interest rates means that less people will take to borrowing money. Therefore, this could lead to the decline in financial related stocks.
The earning season is a period that happens after every three months. This is a period when most companies release their quarterly results and offer guidance. An increase in revenue, earnings per share (EPS) and other metrics is an indication that the company is doing well. This is often an indication that investors will continue being invested in the company. However, this is not always the case. A company might report excellent results but modify their projections downwards. This is usually a bad indication on the company’s performance. If this happens, the investors will exit the company and take the share price lower.
As a stocks trader, you need to have information on when a company will release its quarterly data. This information can be found on the investor relations page of their website. Another comprehensive calendar can be found at investing.com. Below is a sample calendar.
Companies release their data in different times. This is usually an advantage to traders because they can use the information of one company to trade another company. If Goldman Sachs reports poor earnings and offers a weak guidance, chances are that the banking stocks will fall. They will fall because investors anticipate these companies to follow suit because they are in the same industry. At those times, the movements in the banking sector are usually huge.
Mergers and Acquisitions (M&A)
M&E are very beloved by traders because of the opportunities they bring. In M&A, a company decides to acquire another company, either by cash, stock, or both. This means that the acquiring company will need to source funds to buy the other company. As a result, this might affect the dividend payout or share buybacks to investors. The company being acquired on the other hand will accept the acquisition if there is a premium. Therefore, the acquiring company will see a share drop while the one being acquired will see a hike. This is the best time to arbitrage by buying the company to be acquired while shorting the acquirer.
Share buybacks and dividends
This is a situation where a company decides to buy its own shares back. Investors love this situation because it tends to lead to a share hike. When this is announced, investors tend to buy more shares of the company leading to a higher share price. The same happens when a company announces improved dividends. If it reduces dividends, the shares will likely fall leading to a shorting opportunity.