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At first glance, investing in stocks might feel like the easiest thing to do, until you lose your hard-earned money and the returns aren’t what you expected. Maybe you picked the wrong stocks or simply bought them based on the “hot tip” you received from a friend. A lot goes into stock investment and to make solid returns, you need to put in research and time. The stock market is a good place to build wealth but only when you have the right picks in your portfolio.
If you are a beginner and just getting started on investing to achieve your personal finance goals, there are some things you need to understand before you begin. Learning how to read a stock or understanding a stock chart is as vital as picking the right brokerage. Reading stocks isn’t as difficult as it may seem. It is a simple process that makes investing straightforward and less complicated.
Reading a stock chart or stock quotes remains an important skill that helps understand the performance of the stock and all that is happening in the market. When you know the basics, you can make better decisions that will help you get an understanding of stock investment. All stocks have charts or quote pages and they provide basic as well as in-depth information on the stock, the company, and its performance.
In this article
What is a stock chart?
The stock chart is nothing but a table or chart which has information on the company’s stock. It has information about the current stock price, the price changes, highs, lows, trading volume, dividends, and other important company financials. The 52-week low and high are important metrics when you look at the chart. It shows the performance of the stock in one year and reflects the highest as well as the lowest prices at which the stock traded in the particular period. It helps set a range within which the stock has moved in a year. At first glance, it might look like a show of chaotic numbers, colors, lines, or acronyms but after you break them down into different parts, it becomes easier to read and understand.
Components of the stock chart
Ticker symbol
Every company has a ticker symbol and it is used on the stock exchange to identify the stock. It is unique to the company and helps find the stock easily. For example, Apple Inc. has a ticker symbol AAPL and Tesla has TSLA. Be sure to check the ticker when researching the company so that you find information about the right company.
If you want to see a stock chart, just search for the ticker and you will get it. The chart will show the current stock price or a closing price which is the last price a stock traded for during the regular market hours. You can choose any time period to see the price changes. There is a clear line that denotes the price increases or decreases over a specific period. This line makes up the backbone of stock charts. Shown below is a basic stock chart. Let’s take a look at its components.
High, low, and previous close
You will see the open price which is the first price at which the stock trades in the market on a particular day or week. The high and low reflect the highest and lowest prices on that day and the previous close is the closing price of the previous trading day.
Market cap
Market capitalization measures the size of the company. It will consider the number of shares in the stock market multiplied by the current share price and the market cap has a huge impact on the buying decisions.
P/E ratio
A price-earnings ratio or P/E ratio is an important part of stock investment decisions. It is used to check if the stock is undervalued, fairly valued, or overvalued. The P/E ratio can be calculated by dividing the price of the stock by the earnings per share for its previous year.
52-week high and low
Always check the 52-week high and 52-week low to see the price range within which the stock moves. It is the highest price at which the stock has traded in the past year and the lowest price it traded in the year.
Dividend yield
The dividend yield will tell you the amount that you may receive in the form of a dividend from the company. It is the cash payment offered by the company to its shareholders and is paid annually or quarterly. The dividend yield is expressed as a percentage of the current share price. A higher dividend yield means higher returns on your investment.
Earnings per share
The EPS or earnings per share can be found on the stock chart and it shows how well the company is doing. It is measured as the number of net profits the company has earned per one share of the stock. The number is updated every quarter after the company reports the earnings and it is an important measure for investors.
A real-time stock chart of Tesla:
Open and close price and previous close
The opening price is the price at which the stock opened on a day and its close price is the price at which the stock last traded in the regular trading hours. In case the stock closes over and above the previous closing price, you will see an upward trend for it and it will be reflected in the candlestick charts. If the stock price closes lower than the previous day’s close, it is a downward trend. The previous close is the stock price at which the stock closed on the prior day.
Beta
The beta is an important factor in the stock chart. It shows how volatile the stock’s price is in comparison to the overall stock market. This is an indicator of how risky the stock is. When the beta is more than one, the stock has been more volatile than the stock market for a certain period and if it is less than one, the stock has been less volatile than the market for that period. However, past performance is not always indicative of future performance.
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Average volume, day’s range, and volume
The volume is the number of shares traded in the day while average volume is the average daily volume for a particular period. The day’s range will show the highest and the lowest prices the stock has traded for on that trading day.
1-year target estimate
The 1-year target estimate is an estimate of the stock’s price in a year. It shows the consensus of different analysts' price targets for one year but, remember, it is still a forecast and there is no guarantee of the stock price hitting the target.
Moving average
The moving average is a stock indicator that is often used in technical analysis. It will smooth out the price over a certain period of time by creating an updated average price. Most traders consider the 200-day moving average significant when making decisions. If the 50-day moving average is above the 200-day moving average, it is considered that the stock is in a bullish trend. If not, it is considered a bearish trend.
Price action
The price action is the movement of the stock plotted over a period of time. It is the base of technical analysis and many traders rely on it for making decisions. Price action trading is ideal for short to medium-term profit trades and not suitable for long-term investments.
How to read a stock chart
A stock chart is different from the basic chart you find on Google. It includes plot lines, and charting and represents the price movement of the stock. The price line is represented in the form of a mountain of a line and there is a thin line that shows the price movements in a particular period, which is usually six months to a year. When analyzing an interactive chart, it is possible to set the chart to various time frames that can start from five years back to one day.
Check the axis
The stock chart will have two axes- one is the time axis while the other is the price axis. The bottom or horizontal axis reflects the time period for the chart and it can be customized to show any period ranging from one year, multiple years, or one day. On the other hand, there is a side or vertical axis which represents the stock price. You can use the two axis to plot a trend line that shows the stock price over a period of time. The two lines form the entire framework of the stock chart.
Trend line
You can find more information about the stock chart in a trend line. Based on the type of chart you are studying, you will have the option to choose the various chart styles ranging from a bar, candlestick, traditional line, or any other style. Let’s dig deeper into them.
Bar charts. The chart will show the highest as well as the lowest stock price in the day and will also have the closing price of the stock to reflect its trend.
Line charts. A traditional line chart tracks the basic price movement of the stock with the last price of the stock.
Candlestick charts. You might find the candlestick chart a little complex but it has clear boxes that show a time when the price of the stock had closed higher and pink or red boxes that show the stock had closed lower than the prior day. A chart will use the stock's high, low, open, and close prices to chart the trends. The opening and closing price is the most essential in the chart as it helps determine if there was an upside or downside momentum for the stock. There are different chart patterns under each chart and they help with technical analysis. However, they are not easy to read and ideal for professional analysts.
Check the trading volume
After looking at the trend, it is important to consider the trading volume when reading the stock chart. This volume is shown at the bottom of the chart in red and green bars. You need to look for the spikes in the day’s trading volume which show the strength of the trend. It will show whether the high trading volume is up or down. Whenever there is a drop in the stock price, the volume rises and this means that there is more strength to the downward trend of the stock as compared to the short-term blip.
Look for lines of resistance and support
Whenever you read stock charts, you need to look for the lines of resistance and support. When the stock trade is up or down, you will see it eventually fall in the support or resistance lines. The support line shows the price that the stock does not usually drop beneath. So, in essence, it is a line that supports the stock and holds it upward so that it does not fall below the price. In contrast, the resistance line is the stock price that the stock does not trade above, this means, it will stop the stock from pushing beyond the top price. The price of the stock will move between these two lines and if it pushes beyond the resistance levels, then the previous resistant line will become a new support line which means it could go higher. But the opposite also applies when the stock drops below its support line. These lines help predict or understand the overall trend of a stock and when it might go up or down.
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The bottom line
While you continue to read the stock chart for more information, remember that it is rare for the stock to move in one direction, you will see swings and they are normal. Do not panic when you see a big slump or spike. Look into the details and range to understand how the stock has moved. Always look at the longer time horizon for a complete picture of the trading activity in the stock. Lastly, not all stock charts will serve your purpose. Some might be suitable for traders while some might be ideal for long-term investors. Hence, choose the right type of chart before you begin stock analysis.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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