After this guide you can
- Read revenue, profit and cash-flow drivers
- Recognise earnings and corporate-action risk
- Calculate size from stop distance
Start with the business, not a famous name
Write one paragraph explaining how the company earns revenue, who its main customer is and which cost most pressures profit. Compare sales growth, margins, operating cash flow, debt and share count over several periods. Revenue growth without cash conversion can give an incomplete picture of business quality.
Compare price/earnings with comparable companies and the company’s history. One-off profits or a loss-making business can make the ratio misleading. A low nominal share price does not establish cheapness; market capitalisation and share count matter too.
Earnings: facts versus expectations
Prices can fall after apparently good earnings because expectations were higher or management’s outlook weakened. Check reporting dates, forward guidance, margin changes and industry reaction. Decide whether to hold through earnings before publication, not after the price jumps.
Outside core hours, order depth can be lower and spreads wider. Opening gaps can pass through stops. Specify whether the scenario includes overnight and earnings exposure and how this affects position size.
Orders and ownership rights
Market orders prioritise execution, not a predetermined final price. Limit orders specify maximum purchase or minimum sale prices but do not guarantee a fill. A stop usually becomes a market order on activation; a stop-limit can fail to exit during a fast move.
Actual shares, share CFDs and short selling have different structures. Read voting, dividend, adjustment, financing and share-borrowing terms. An uncovered short can incur very large losses if price rises sharply; initial margin does not cap them.
Corporate actions and the trading journal
Splits, capital increases and dividends affect prices and units. A two-for-one split does not itself double the economic value of ownership. Establish whether historical charts are raw or adjusted for splits and dividends.
Separate rationale from outcome in the journal: company catalyst, invalidation, quantity, costs and next event. After exiting, assess whether the fundamental assumption changed or execution was weak. A profitable trade that violated the plan does not prove the method’s quality.
Educational calculation · hypothetical numbers
Position size and a post-earnings gap
Hypothetical entry is 50 dollars, stop 47.50 and example loss budget 100 dollars.
| Step | Result and interpretation |
|---|---|
| Theoretical risk per share | 50 − 47.50 = 2.50 dollars |
| Quantity before costs | 100 ÷ 2.50 = 40 shares |
| Purchase value | 40 × 50 = 2,000 dollars |
| If the share opens directly at 45 dollars | Exiting there loses 40 × 5 = 200 dollars |
A normal stop does not prevent gaps. 40 shares is solely the result of these assumptions; check commission, relevant taxes, account currency and whether that quantity is available separately.
Before submitting an order
- I understand revenue sources and the next company event.
- Earnings timing and the overnight-holding decision are clear.
- I read ownership, order and cost terms.
- I assessed total concentration in one company or industry.
Mistakes to recognise
- Buying only because the share has fallen far from its previous high.
- Inferring lasting profit growth from a one-off gain.
- Assuming a limit order always fills.
Check your understanding
What theoretically happens to twenty 100-dollar shares in a two-for-one split?
Show answer and reasoning
They become forty shares at a theoretical 50 dollars each: still 2,000 dollars in total before actual market moves and costs. More shares do not mean twice the wealth.
Key terms
- Cash flow
- Actual money inflows and outflows; distinct from accounting profit.
- Market capitalisation
- Share price multiplied by the relevant share count.
- Price gap
- A distance between traded levels without trades at intermediate prices.
For further reading
This guide was independently written. The official sources below support further study of the concepts; product rules and local regulations may differ.
This guide is educational, not a personal buy or sell recommendation. Examples do not establish specifications of products offered by CAPITEX.