When I see the earnings of a stock, how do I know if they are good or bad?

You did it! You've finally worked up the courage to take the money from that savings account and invest it in stocks. Congratulations, you're an investor! But now that you've actually purchased stock, what's next? You know that you're the kind of person who wants to study your stocks on a weekly basis. You want to be informed about what your stock is doing. But you're not entirely sure what all the numbers and information surrounding a stock actually means. Terms like earnings per share, revenue, and price/earnings ratio have sent your head spinning. What does it all even mean? What you really want to know is when you see the earnings of a stock, how you can tell if they are good or bad?

You've come to the right place. Hopefully by the time you've finished reading this article you will not only have a better understanding of what earnings of stock actually is and you will also know how to tell if they are good or bad for your stock.

The first term you need to learn is "earnings." This refers to the amount of profit that a company produces in a given period (usually a quarter-3 months, or a year-a 12 month period, not necessarily a calendar year). It is usually the net income, or the income after-taxes and other expenses. The earnings of a business dictate its share price (stock price) because the earnings typically indicate whether or not the business will be successful over the next period.

The earnings of a company for a given period are usually compared with the estimates of professional investors and stock brokers to the actual earnings of the business in previous periods. A stock will often drop if the earnings do not meet the expectations of the analysts or the average of previous business. However, when the earnings exceed the expectations of analysts or business averages, stock prices will increase greatly. So you know that the earnings of a stock are good when the prices surge and the earnings of a stock are bad when prices drop.

Another way to tell how the earnings of a stock are doing is to look at "earnings guidance." This refers to the comments and suggestion that the management of a company gives to the public about what they expect their company to do in the future. They usually focus on the company's sales and earnings and give their predictions based on their plans for the company and the trends of their industry. Investors use these comments to calculate the company's earnings potential and therefore the value of the company's stock.

Earnings guidance can be very helpful to an investor. In reality, only the management of a company really knows how its company is doing, and only they have the ability to reveal their company's plans and future expectations. They may be able to offer you very useful information about investing (or not investing) in their stock.

However, you may be going "out on a limb" when you trust whatever the management says about their company. Not all management will be completely, 100% honest with the investor. The management of a company has the ability to sway the market by whatever they say: an optimistic forecast will increase their stock value, while a pessimistic forecast will decrease their stock value. They will tend to be optimistic no matter what and will down play any problems as being "short term." In the long run, it is your job as an investor to decide whether what the management is saying is true or false. Never buy or sell based solely on the recommendations of someone else.

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