How To Read A Stock Chart | Invest
Before investing in the stock market, it is essential to understand the basics of investing and how to interpret the huge amount of information available. Before the Internet, the average investor relied on newspapers. Today there is so much information available that it is almost impossible to keep up.
Fortunately, not all information is necessary to track your investments. An essential tool, however, is the stock chart.
Here are some things to look for when looking at a stock chart:
Current price. This is the exact price of the action. You can usually see it at the top of the chart, or you can look at the most recent point on the chart. You can actually watch the stock price change from moment to moment.
daily movement. Most charts will have an up or down arrow next to the price, followed by the stock’s progress that day in dollars and percentage. On an average day, most major stocks will move up to 2% higher or lower. If a stock is moving more than that, it’s likely the company has announced some major news or the stock market has had a volatile day.
Opening and closing prices. On the chart itself, you can see where the price opened at 9:30 a.m. EST and where it closed, above or below that point, at 4:00 p.m. EST. Time is on the X axis and price will be on the Y axis. For a daily chart, the range will likely be very narrow, allowing you to see exactly where the stock traded at any given time of day . Many websites also provide a summary description of what happened that day, and it will include the opening and closing price, as well as the range in which the stock traded.
Volume and average volume. This tells you how many shares of the stock were traded that day. It could range from a few thousand to hundreds of millions, depending on the stock, the news of the day, and general market conditions. On a long-term chart, you can find the daily volume at the bottom of the chart. Days when the stock has gone up often have a green volume line, while others have red for days that have gone down. Average volume isn’t often found on a chart, but if it is, you’ll see a squiggly line drawn over the entire time frame, showing the 30-day average. Volume can be a very useful tool, especially for small actions. “Small stocks that rise or fall on much higher than average volume can tell investors something important,” says Ed Butowsky, managing partner of Chapwood Investments in Addison, Texas. “If this stock is at or near a previous high or low, and volume is above average, it may mean the stock is ready to break above that previous high or low.”
Price/earnings ratio. This is often found in the daily data summary. It is a ratio of today’s current price divided by the amount the company has earned per share. It is only an indicator to help investors decide if they are paying too much for a stock. For example, if the P/E ratio is very high relative to earnings growth each year, it may mean that the stock is trading at a higher price than the stock’s actual value.
Earnings per share. This is also often located on the daily summary of a stock quote. It tells you the net income the company earned divided by the number of shares it issued. Sometimes this amount will be expressed as the expected profits for the current fiscal year, and sometimes it will be the actual profits for the previous four quarters, called “trailing 12 months profits” or TTM. Peter Lynch, in his famous book, “One Up on Wall Street,” said that stock prices generally track earnings per share growth. If a stock’s EPS increases by 15% per year, the stock price is generally expected to increase by 15% per year.
Market capitalization. Also called market capitalization, this refers to the product of the total number of shares issued multiplied by the current price of the day. It tells you the overall value that the market considers the value of the business. The smaller the market capitalization, the greater the potential growth of the company. For example, a small company with a market capitalization of $1 billion could grow 683 times its current size to become as valuable as Apple (ticker: AAPL). The market capitalization is usually found in the daily summary and not on the chart.
Simple moving average. This can be one of the most important aspects of a stock chart. The 200-day SMA will be identified as such and will appear as a line that traces the general direction of the stock price over the very long term. If it’s not on the graph, you can probably add a parameter that will make it appear. Sometimes the stock price will be above this line, and sometimes it will be below. The 200-day SMA has great significance for individual stocks. “Breaking the 200-day SMA has always meant that a security was heading into a long-term uptrend or downtrend,” Butowksy said. “This means the stock is showing signs of increasing accumulation or distribution [selling]. Thus, it triggers trading computer programs that match this trend. You will often see a stock that falls below its 200-day SMA suddenly drop even more on high volume and vice versa.”
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Stock market information as of May 26, 2017