By Saksham Arora If you watch the stock market closely, you quickly realise that long-term stock prices are driven by big, sweeping forces, things like economic growth, interest rates, and industry trends. But on a day-to-day basis? The market is driven by immediate catalysts.
That’s where corporate actions come in.
Some of the most effective catalysts are buybacks and earnings announcements. Here’s how they affect market sentiment, and consequently, the stock price.
1. Earnings Season
Every quarter, a publicly traded company will announce its quarterly financial performance. Looking at the NSE upcoming results will tell you when a stock is about to report its earnings. This tends to cause a spike in volume and implied volatility (IV). Now, IV is simply indicative of the depth in the movement, and not the direction. So, during earnings season, expect more movement in the stock price. Positive or negative movement? That depends on other factors.
Variance
The stock price in the days leading up to the earnings announcements usually incorporates expectations of the company’s performance. If the company reports better-than-expected performance, the stock typically moves upward. But if the market expected 25% better performance while the company delivered 20%, the stock may move downward despite the positive result.
Forward-looking Bias
Another peculiar case is the management outlook for the forthcoming quarter. If the management signals order book weakness, or margin pressures, or regulatory hurdles for the coming quarter, short-term traders could look to settle their long-term positions. This would, in turn, drive the price down, regardless of the quarterly performance that was just reported.
Ripple Effect
If a major stock from a specific sector talks about reducing margins, there is a tendency for other stocks in the sector to feel the ripple effect. Traders naturally extend the same logic to other companies, expecting a negative or lower-than-expected quarterly result. So if traders opt out of bellwether stocks, other companies in the sector will also have sellers.
2. Share Buyback
When a company buys its own shares—either from the open market or directly from investors—it’s called a share buyback. Once bought, these shares are permanently cancelled, which shrinks the overall share pool.
Why do companies buy back shares?
Better Financial Ratios: Fewer outstanding shares mean that the earnings per share (EPS) and return on equity (ROE) automatically increase, making the company seem more profitable to investors. So even if the profit remains the same, improved financial ratios look great on paper.
Projecting Confidence: A buyback acts as a powerful psychological signal. It tells the market that management believes the stock is undervalued and has bright days ahead. This shift in sentiment is often all it takes to draw in fresh buyers and give the stock price a quick lift.
Consolidates Ownership: If company promoters do not tender their shares during the buyback, it increases their stake in the company. Furthermore, reducing the number of available shares prevents the possibility of hostile takeovers as well.
Strategic Flexibility: Committing to a dividends programme can weigh negatively on the stock if the regular dividend is reduced. But with buybacks, companies can prevent a negative market reaction.
As for the stock price movement, there’s a two-pronged approach:
To begin with, an upcoming buyback is usually announced at prices above the prevailing market prices, thus encouraging shareholders to offer their stocks. The effect of this move is that more people come into the market, raising the market prices towards the buyback prices.
Secondly, when the firm purchases the shares from the open market, it does so over days or even weeks. This results in a steady demand. Over the short term, such demand automatically assists in driving the share prices upwards.
It’s important to revisit the idea that the current stock price usually has the market expectation baked in. So, even after a stellar earnings or potential buyback announcement, the stock price may drop, as early investors look to book profits, passing on the shares to latecomers.
Final Thoughts
For short-term traders, corporate actions and earnings announcements are a period of high risk and high reward. They tend to override macro factors and create an immediate short-term impact. Coming out on top of this volatile window requires observance of market expectations and company narrative, all of which can be done on a SEBI-authorised broker like Dhan. This may be more important than the result itself.