When entering the world of investing, there are a few things you will need to understand before embarking on the journey. One of the first steps is learning how to read and understand stock charts. By learning how to read stock charts and graphs, you will be able to understand how the stock is performing as well as gain a picture of the broader market. This can provide you with a better indication of how a stock might perform and whether you should invest in it. Reading stock charts only requires a few simple steps, including:
- Observing the price and time axes.
- Observing the trend line.
- Looking at the trading volume.
- Looking at the lines of support and resistance.
- Reviewing the one-year estimated target.
- Observing when the dividend and stock splits occur.
How to Read Stock Charts
Stock charts represent the price movements of stock as well as general information. You can customize charts for any time period, from a quarter to six months to years. The question is, how do you use this information to determine how your stock is doing or whether a stock is a sound investment?
1. Observe the Price and Time Axes
A stock chart has two primary axes: the time axis and the price axis. The horizontal line shows the time period the chart represents. This axis can be broken up into various time increments depending on the range you are looking at. The vertical axis, located along the side of the chart, represents the stock’s price movement. With both forms of data, you can detect an upward or downward trend to see how the stock is performing over the represented period.
2. Observe the Trend Line
The trend line is the graph formed after plotting and connecting the price and time. There are a few ways the trend line can be represented. You might see a traditional line graph that shows consistent upward or downward movement, a bar graph that shows the price range in highs and lows, or other chart forms.
A candlestick chart is a more complex graph. These typically include clear or green boxes that plot periods when the stock closed higher than the previous period, which can represent a bullish trend. Candlestick charts might use red or pink boxes if the day closes lower, which can indicate a bearish trend. The plot points represent each day’s opening and closing prices.
3. Look at the Trading Volume
Stock prices and trends are two of the key pieces to observe when reading a stock chart. One of the final crucial components is the trading volume. You will usually find the trading volume at the bottom of the stock chart, in either a green or red bar. Look for spikes that might indicate a trend’s strength. If a stock’s price drops but the trading value remains high, it might indicate a strong downward trend.
4. Look for the Line of Support and Resistance
Support and resistance are the lines that identify when a stock is trading up or down. The support line typically indicates the value below which the stock price rarely falls. It will support the stock and prevent it from trading below that price. The resistance line is the price the stock normally does not trade higher than. The stock will resist pushing past this top price.
You can expect the normal stock price to fluctuate between the support line and the resistance line. In the event the stock pushes past the resistance line, that figure often becomes the new support line, meaning the stock might begin to trend above that line. If the stock drops below the support line, the support line will lower, as well.
5. Review the One-Year Estimated Target
You might see a one-year estimated target, which is an analyst’s estimate of what one share of stock for that company might be worth at the conclusion of a year. These are not always solid estimates, but when combined with other metrics, they can provide for a better picture.
6. Observe When the Dividend and Stock Split Occurs
You can find this information at the bottom of the chart. It shows when a dividend was issued or if there ever was a split in the stock. Whether shareholders will receive dividends depends on if the company decides to share profits with the shareholders or to reinvest its earnings. Avoid basing your decision to invest in a stock simply on whether you’ll receive dividends. When companies decide to reinvest the money, it means they are focusing on their growth, which means the stock could continue to trend upward.
Components of a Stock Chart
A stock table or chart is a picture of information that provides you with what you need to know about a company’s stock, such as price changes, the trading price, the volume, dividends, historical highs and lows, and company financial information. Some of the components you should focus on when looking at a chart include:
The 52-Week High and Low
This metric shows a stock’s trajectory over the year. You will see the highest price it traded for during the year as well as the lowest.
This is the symbol the exchange uses to identify a specific stock. You can find the ticker symbol in the column ticker or directly next to the stock, in parentheses. The ticker symbol is a set of letters to identify the stock, such as AAPL for Apple. Many of the symbols look like logical abbreviations while others don’t, so learn the symbols for the stocks you’re following.
Dividend per Share
A dividend is a small amount or portion of the company’s profits, which it will disburse to shareholders on a set schedule. Some stocks pay dividends, while others do not. The ones that do will have a representation in the stock chart referred to as dividend payment per share for investors, indicating the annual payout for those dividends.
The dividend yield is related to the dividend paid out and reflects the percentage of return gained on the dividend. It’s determined by dividing the annual dividend payout by the stock’s current price.
The price-to-earnings ratio, or P/E, is a crucial metric to observe when looking at a stock chart. The calculation is determined by dividing the current stock price by the earnings per share over the past four quarters.
Day High and Low
In addition to the 52-week high and low, you will see the high and low for the day, which shows the highest price the stock traded for that day as well as the lowest point it hit. These can be, but are not always, the same as the stock’s opening and closing prices.
The Opening Price
This section simply states the price a stock opened at on any specific trading day.
The Closing Price
The price a stock closes at for the day can be one of the most vital pieces of information on the stock chart. This number indicates the stock’s final price at the end of normal trading hours. If the stock price closes higher than it did the previous day, it’s considered to be an indication of upward movement. If the close price is lower than the previous day’s, then it is considered a downward movement.
This metric indicates the price the stock closed at on the previous day.
You are likely to have heard that a stock is up or down for the day. This terminology is the net change, or the dollar value change that occurred from the previous days’ closing. A positive change indicates a stock is up, and a negative change indicates a stock is down.
Also check for stock splits, which are strategies a company’s board might implement to offer more shares to the public. For example, a six for one stock split, which would be noted as 6:1 on the chart, means that for every one share stockholders held before the split, they will now own six. This does not necessarily change the company’s value but can change the share price. Companies often implement this strategy to attract smaller investors or to bring the price in line with its competition. After a stock split occurs, you’ll often see an upward trend in demand.
Learning how to read a stock chart is crucial to understanding stock prices, looking for trends, and making better investment decisions. If you would like to learn more about how to read stock market charts or how to get started investing, check out our free e-book or register for one of our webinar sessions today.