Once you have decided you want to get into stocks through trading, investing, or a bit of both, you also need to study up on how to read stocks to truly get started on your journey. The basics of reading a stock chart are essential to know if you want to put your money into a profitable and healthy company.
When reading the information of a stock from its chart, you are taking the first step to understanding what it takes to make better decisions on what is happening in the market and with the specific stock you have chosen or may decide to invest in. Maybe the chart is telling you the company is going through a not-so-profitable period, or maybe its going through all time highs. A chart can tell you this as well as the financial history of the company and the amount of dividends it pays.
So how does one read stocks? This article will explain how this important skill can be obtained, and once obtained how it is crucial knowledge to have in order to have a greater chance of success in the market. Once you are able to read stocks, you can choose which stocks will be a part of your portfolio based on a company’s performance. We will go over the basics and identify how to read a stock chart.
- What is a Stock Chart?
- How to Read a Stock Chart
- Stock Chart Information
What Is a Stock Chart?
A stock chart, or table, is a series of information of a particular company’s stock. The information shows the current trading price, a range from low to high during a certain period, trading volume, and dividends. If you want to learn how a company is doing, it is important to know how to read a stock chart and the information that it provides. You can find the following information on a stock chart:
The ticker symbol is what is used in the stock market to identify a particular stock. For example, Apple’s ticker symbol is AAPL and Amazon’s is AMZN on NASDAQ. Sometimes this ticker is found next to the name of the company in parenthesis in the stock chart or under a ticker column.
52-Week High and Low
The 52-week high and low is the range of the lowest and highest price the stock has had during the past year. It gives the person looking at the chart a vast picture of how the company has been performing through the year and is important to understanding its financial health.
A dividend yield is calculated by dividing the annual dividend — if the company offers dividends — by the current stock price. Income investors look for stocks that offer a high dividend yield for their investment.
Dividend per Share
If a company does offer its shareholders a dividend per share, it will be in the form of a small payout that is taken from the company’s profit and distributed.
Day High and Low
The day high and low shows the day’s high price and low price the stock had for the trading day.
A price-to-earnings ratio, also known as P/E ratio, is found by dividing the current stock price by its earnings per share for the last four quarters. It is a key metric to understanding the financial health of a company.
Open price is the price the stock opened with at the beginning of the trading day.
Close price is the price the stock closed with at the end of a trading day.
Previous close is the the price at which the stock closed for the end of the previous trading day.
The net change of a stock price is determined either up or down depending on the previous day’s close. It is a comparison of the two days’ closing prices. A positive net change in price means the stock is up for the day, while a negative net change means it’s down.
How to Read a Stock Chart
The lines and numbers on a stock chart represent the prices of the stock during a given time frame. The lines are not static because they represent the movement of the stock price at a given time frame.
The horizontal axis represents the time period for the particular stock, which can be from yearly to daily, while the vertical axis shows the price fluctuation of the stock. These two help determine the price of the stock for a particular time frame. You can choose a line, bar, or candlestick chart style to help determine the trend of the stock.
When reading a stock chart, it is also a good idea to look at the trading volume for the stock. If there is a strong trading volume, it can indicate upward or downward movement in price. Identifying support and resistance lines is also an important thing to master for reading charts. Stocks move up and down, but the price at a given time period can be placed between a support line and a resistance line. A stock’s price doesn’t usually fall below the support line, and it typically doesn’t go above the resistance line.
If the price does go above or below these lines, the previous resistance line may become the new support line, or the previous support line may become the new resistance line. Your lines will be drawn differently depending on whether you plan to hold long-term or are an active trader. These lines can help you to know when might be the best time to buy or sell; you might want to sell when a stock is nearing its resistance line and buy when a stock is close to its support line.
The bottom of the chart also shows when the company issues dividends, which is when the board of directors decides to give a part of the company’s earnings back to shareholders. Not all companies pay dividends, but that alone doesn’t mean a company is not worth investing in. Some companies can afford to give out dividends without sacrificing growth, while others want to focus exclusively on growth and reinvest those funds.
At the bottom of the chart, you can also see when a company does a stock split. When a company’s board of directors decides to do a stock split, they want to issue more shares of a stock to the public. If, for instance, the company does a seven to one split, you would end up with seven times the number of shares you originally had. The company’s value does not change, but the stock price can change.
Stock Chart Information
Depending on the stock chart you are looking at, some come with additional information that you may find helpful to get to know the company’s stock. The earnings per share is an indicator of how well the company is doing since it measures the net profits a company has earned per share of its stock. This information is updated for each quarter after a company’s earnings.
A company’s market cap is determined by multiplying the number of shares that company has issued to the public by the current price of one share of stock. Investors and traders sometimes read up on what different analysts have to say about a particular company. These are estimates or opinions, so they should be taken as a part of a whole analysis in a company.
Learning to read stock charts does take a little time to get used to, but once you understand the basics, you can then look over the charts with ease. Reading stock charts will help you advance as an investor and trader by helping you understand the health of a company over a certain period of time, which will help you decide whether to buy or sell stock. If you want to learn more about the stock market, read some more information in our free e-book.