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Sunday, April 14, 2024

How to read stock charts: Learn the basics

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For novice investors, stock charts and their data may seem intricate and challenging to comprehend. However, by seeking guidance, these charts and the included details can help you analyze potential investments efficiently and find appealing opportunities.

If you learn the fundamentals of reading a stock chart, you can efficiently evaluate new stock options and decide which investments are worth exploring further.

For beginners who want to learn how to read stock charts, these are the fundamental concepts to keep in mind.

How to read a stock chart

Different platforms show different stock charts. You can get free stock charts from financial websites, or from your online stock broker. The chart shown below is an example taken from Google Finance:

The chart

One of the easiest ways to understand how a stock’s price has changed over time is by looking at its chart. The chart typically displays time on the x-axis and the price per share on the y-axis. By looking at the chart, you can quickly see where the stock has been trading. You can also select different periods for evaluation from the top of the chart.

The top left corner displays the current price per share of Tesla stock, which is currently $998.50. The section below it shows the stock’s performance over the selected time period. As per the data, Tesla has shown an increase of $284.78, which is almost 40 percent, over the past year.

Google Finance charts have a feature where the chart line changes color depending on the stock’s performance during the chosen time frame. If the stock has increased over that period of time, the line will be green, as can be seen in the example of Tesla’s stock over the past 12 months.

To understand the performance of the underlying business, it is recommended to analyze the long-term price chart. While stock prices can be volatile in the short term, they usually reflect the business’s performance over time.

Stock chart data basics to know

Most stock charts are accompanied by data. The following are definitions of commonly used terms in stock market data.

  • Open: This amount is the opening price of the stock for that particular day.
  • High/low: The numbers displayed represent the highest and lowest prices at which the stock was traded on the current day.
  • Market cap: This figure represents the market capitalization of the company, which is the total value of all the shares available for trading. It indicates the current price at which the entire company can be purchased.
  • P/E ratio: The P/E ratio is a valuation ratio that compares a company’s stock price to its annual earnings. It is widely used in investment analysis to assess whether a stock is priced fairly.
  • Dividend yield: To calculate the figure, divide the annual dividends per share by the current share price. Companies use dividends to distribute profits among shareholders.
  • 52-week high/low: This shows you the maximum and minimum prices that the stock has been traded at in the previous year. Some investors search for companies that are trading near their 52-week lows as they may be undervalued.

Other stock market terms that may come up

Stock charts may vary based on the source you use. In addition, you could encounter other terms related to stock charts when examining them and researching companies.

  • Volume/average volume: The term “volume” in the stock market means the total number of shares that were traded during a single day. Sometimes, you might come across the “average volume” figure, which indicates the average volume of shares traded daily for a specific period, like 30 days. Typically, leading companies tend to trade millions of shares every day.
  • EPS: The abbreviation EPS represents earnings per share, which calculates the profit earned by a company per individual share.
  • Ex-dividend date: This message is about the deadline for owning company shares to be eligible for the upcoming dividend payment. You won’t receive the dividend if you do not own ownership on or before this date.
  • Beta: Some investors use a number called beta to assess how risky shares are based on their volatility. If a beta is above 1, the shares have been more volatile than the overall market during the specified time period, while a beta below 1 indicates that the shares have been less volatile. However, not all investors consider share price volatility the best risk measure.
  • One-year target estimate: The number provided is an estimation of the stock price after a year, which is usually calculated by averaging the predictions of multiple analysts. It’s important to note that relying too much on this number may not be wise, as many predictions often end up being incorrect.

Bottom line

When you are researching a new stock, stock charts, and their associated data can be valuable tools. Once you understand the fundamentals, you can efficiently look at multiple charts and gather crucial information.

Remember that while stock charts may demonstrate price fluctuations in the short term, the primary factor driving a stock’s long-term value is the earnings and cash flow of the underlying company. Ultimately, a stock’s success is tied to the success of the business that it represents.

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