In general, a simple line chart can provide you with basic information about a stock’s trend. However, it isn’t the only metric to consider.
Identify Trading Volume
Aside from the stock’s price movement, another important thing to consider when reading a stock chart is the stock’s trading volume.
The volume is usually represented by green and red bars at the bottom of the stock chart (or sometimes blue or purple bars). When looking at trading volume, the essential thing to look for is spikes, which might signal the intensity of a trend – whether it’s strong trade volume down or up. If a stock’s price falls and trading volume rises, it could indicate that the stock’s downward trend is more than just a blip on the radar (and vice versa if the price moves up).
Identify Lines of Support and Resistance
Lines of support and resistance are another key feature to look at on a stock chart. When a stock trades up or down, it usually does so within the confines of what are known as support and resistance lines. In essence, the support line is a price below which the stock is unlikely to fall it “supports” the stock upward and prevents it from trading below that price in response to market signals. The resistance line, on the other hand, is a price over which the stock normally does not trade; it “resists” the stock pushing through that top price.
For beginners, how do you read a stock chart?
This is the blue line you see whenever a stock is mentioned it’s either going up or down, right? While the trend line appears to be self-evident, there are a few points I’d like to emphasize so you can fully comprehend it.
To begin, understand that stocks will take massive drops as well as massive rises. Don’t respond positively or negatively to major reductions or gains. This section of the stock chart should only be used to get a sense of what’s going on.
The trend line, in fact, should encourage you to go further. For example, between 2009 and 2012, Apple’s stock skyrocketed.
But what happened in the years between 2012 and 2013? The stock continued to plummet – at one point, it was down more than 40%!
This is where your trend line will help you out. News comes and goes, but when it coincides with a significant change in the trend line, it’s worth noting.
If you witnessed something similar, I strongly advise you to investigate the company’s situation. Most strong organizations can recover from such setbacks, but not all of them can.
For those who don’t know, Apple went through a few key changes around this time:
First, Steve Jobs, the company’s longstanding CEO, quit (2011). Apple also noticed that, despite a booming smartphone market, their profit margins were shrinking around 2012. Finally, they tried to sell smartphones in developing countries, but they were simply too expensive to compete.
The stock price fell as a result of these issues, as well as a slew of other factors.
But, as the rest of the trend line illustrates, new CEO Tim Cook made several smart steps with the company to turn it around.
The takeaway here is to utilize your trend line as a high-level, first-look indicator of something worth investigating.
Look for lines of support and resistance
These are the levels at which the stock has remained for a certain amount of time. A level of support is a price below which a stock is unlikely to fall, while a level of resistance is a price above which it is unlikely to rise.
Consider these lines to be the bumpers on a bowling alley. The ball bounces back and forth between these inflated barriers while bowling.
Within these lines of support and resistance, the price of a stock does the same thing.
The idea is to figure out when it’s best to buy and when it’s best to sell. Take another look at Apple’s stock chart for an example:
These are subjective, and everyone interprets them differently, but the process is crucial. First, understand that, depending on their investing horizon, everyone will draw lines of resistance and support differently (how long they plan to hold the stock).
Because you don’t care as much about the ups and downs if you plan on holding it for a long time, you may not draw as many lines of support and resistance. If you’re a short-term investor, though, you may need to draw more to examine trends across a shorter time frame.
- The first line of support displayed is Line A. Based on previous trends, you can be confident that the stock price will not fall below this level.
- My first line of defense is Line B. You can see that the stock has currently peaked at that level, and you shouldn’t anticipate it to rise any further.
- The stock has bottomed out again, as shown by Line C, forming a fresh line of support.
- Line D depicts a large increase in the stock price, and I’m confident in identifying this as a new line of resistance.
- Lines E, F, G, and H continue the trend, adding fresh lines of support and resistance as time goes on.
Knowing when to purchase or sell a stock can be aided by understanding the lines of resistance. But keep in mind that it’s subjective, and it won’t provide you with a clear path to follow. You’ll have to rely on your own judgment and analysis.
Know when dividends and stock splits occur
You can see if and when the company paid a dividend, as well as if there was ever a stock split, at the bottom of the chart:
When a company’s board of directors agrees to pay a percentage of its earnings to its shareholders, this is known as a dividend.
You earn a modest portion of the profit if you own the stock.
Some businesses pay dividends, while others do not. It doesn’t mean a firm isn’t worth investing in just because it pays a dividend or doesn’t. There are a slew of other issues to think about.
Some businesses would rather focus on expansion than return profits to shareholders, thus they will reinvest their profits rather than distribute them to shareholders. Other companies, such as Apple, may pay dividends while still growing.
Apple began paying quarterly dividends to its stockholders in mid-2012, as you can see in the image.
You can also observe that in 2014, there was a stock split. A stock split is a strategic decision made by the board of directors of a firm to issue more shares of stock to the general public.
In this scenario, Apple performed a seven-to-one stock split (abbreviated as 7:1), which means you now have seven shares of AAPL for every one you had before the split. So, if you had 100 APPL shares before the split, you now have 700.
The company’s value does not change, but the share price may. Companies will frequently do this if their price isn’t competitive or if they want to attract smaller investors (if the share price decreases).
The rise in the trend line after the separation can also be seen. When a stock split occurs, more people invest (due to the lower share price), increasing demand and, in many situations, the overall share price.
Understand historic trading volumes
Many small vertical lines may be seen towards the bottom of the chart. This is a trend in the number of times the stock has been traded.
Volumes are useful, but they shouldn’t be your primary consideration when purchasing a stock. When a corporation receives important news (good or bad), trade volumes usually rise.
When volume increases, the price of a stock can swiftly fluctuate. Consider the following scenario:
You can see that there was a lot of trading activity in Line A, which linked to a dip in the stock price. There could have been something in the news that day that made them nervous (aside from the entire economy crashing that year).
A minor increase in trading volume can be seen in Line B, which correlates to an upward trend in the stock price.
Although there isn’t necessarily a link between stock price and trading volume, knowing what the volumes have been in the past and what they are presently is important before making a decision.
When you buy or sell in large quantities, it’s easier. You should be able to buy or sell the stock fast if a large number of individuals are trading it that day.
How do you interpret stock prices?
A stock is a share of a company’s ownership that includes a claim on the company’s earnings and assets. As a result, investors own a portion of the corporation. Fractional shares of stock are similar to full shares of common stock in that they indicate ownership of a corporation but in a smaller amount.
How do you interpret stock market data?
When you check for a stock quote, you’ll see a lot of different figures, prices, and diagrams. Understanding what they all imply can assist you in making an informed stock purchase decision.
Last Price
The latest price at which the stock has traded. However, the latest price is not the price you will pay for the stock. Knowing how to read stock prices is crucial for investors, especially if they’re making short-term investments.
Today’s Open
When the markets opened this morning, this was the first price at which this stock traded. Due to after-hours trading, equities do not open at the same price as they closed the day before.
Volume
This is the total number of shares that have changed hands in the last 24 hours. Some equities move millions of shares each day, while others trade only a few hundred or possibly none at all (the higher the volume, the more liquid the stock is).
Charts
Stock graphs are available in a variety of formats, and there are entire investing strategies predicated on learning how to read them. They all track pricing data, usually the OHLC (open, high, low, close), but they can show it in a variety of forms (lines, bars, candlesticks), date ranges (day, week, month, year, 5 years, 10 years), and other indicators such as volume, moving averages, and dozens more. Long-term investors and day traders equally benefit from knowing how to read stock charts.
Annual Dividend Yield
This is a key stock return metric that is determined by dividing the annual dividend amount by the current stock price. The yearly dividend yield is 5% if the stock is $10 and the corporation pays out a $0.50 cash dividend per share.
Market Cap (aka Market Capitalization):
Is the total dollar market value of all outstanding shares of a corporation. A company’s market cap is computed by multiplying its outstanding shares by the current market price of one share. The relative size of the company is determined by this figure.
Price-Earnings Ratio (P/E)
The P/E ratio is an important aspect of understanding how to read stock financial statements. It is a valuation ratio that compares a company’s current share price to its per-share earnings.
Beta
Is a metric for comparing a stock’s volatility to the market as a whole. A beta of 1 indicates that the stock moves faster up or down than the market as a whole; a beta between 0 and 1 indicates that the stock does not move as much as the market as a whole; and a negative beta indicates that the stock moves in the opposite direction of the market as a whole.
How do I interpret my stock portfolio?
Terms to understand while looking at a stock chart The open is the first price at which a stock trades during regular market hours, while the high and low represent the stock’s highest and lowest values during those hours, respectively. The prior trading day’s closing price is known as the previous close.
How can you know if a stock will rise or fall?
The quantity of shares or contracts traded in the market is referred to as trading volume. It indicates whether market participants are backing a particular price trend. When the price of a company rises with higher-than-normal volume, it signals that investors are behind the rally and that the stock will continue to rise.
How can I learn how to trade stocks?
The stock market is not as difficult to grasp as you might believe, and anyone can learn to trade equities. There are numerous ways to learn the fundamentals of the stock market. You can learn stock market with serious and continuous efforts.
You might have a query in your head. Why should I learn how to trade stocks? You could be a student, a recent graduate, or even retired. Whatever your position or age, you may have a few unfulfilled aspirations. And for that, you’ll need the right quantity of money at the right moment, which means you’ll have to start investing. You won’t be able to reach your goals until you start allocating a percentage of your income to investments. It does not imply that you must have millions of dollars to invest in the stock market. You can start investing in mutual funds every month with as little as Rs. 500. There are many different types of financial assets, such as stocks, mutual funds, SIPs, derivatives, currency, commodities, bonds, and so on. Don’t worry if you don’t know what these terms mean. During the course of your studies, you will get to know them.
Investing instils a sense of order in your life. To have a safe future in this world of unpredictability, you must have a backup plan. Because of the power of compounding, if you make investing a habit, you will see high returns after a given length of time. âAnyone who is not investing right now is missing out on a huge opportunity,” Carlos Slim stated. When it comes to investing, there is no such thing as tomorrow or later. Markets, like everything else in life, have a risk aspect attached to them. âIf you don’t risk anything, you don’t risk anything,â explains Geena Davis. As a result, depending on your age, income, and other considerations, you may need to take calculated risks in order to improve your future prospects. You will all have different wants and goals, but the market has a solution for everyone. Whether you are a risk taker or a risk averse individual, there are financial assets available to you.
To begin investing, you do not need to be an expert in the stock market. You can become an expert over time if you learn in a systematic and steady manner. Reading a lot about the stock market through articles, books, videos, and other ways will help you establish the necessary skill set to begin your investment adventure. There are also several online portals that provide stock market basics courses.
Let’s take a closer look at the many possibilities for learning stock market trading.
How do you make money using stocks?
However, the major motivation for stock ownership is to generate a profit. Dividends are paid on the shares. Although not all equities pay dividends, a large number of them do. Dividends are payments made to shareholders from a company’s earnings, and they’re usually made quarterly.
High-yield savings accounts
This is one of the simplest methods to get a higher rate of return on your money than you would in a traditional checking account. High-yield savings accounts, which are frequently opened through an online bank, provide greater interest than normal savings accounts on average while still allowing users to access their funds on a regular basis.
This is a good location to put money if you’re saving for a big purchase in the next several years or just keeping it safe in case of an emergency.
Certificates of deposit (CDs)
CDs are another method to earn extra interest on your savings, but they will keep your money in your account for a longer period of time than a high-yield savings account. You can buy a CD for as little as six months, a year, or even five years, but you won’t be able to access the money until the CD matures unless you incur a penalty.
These are very safe, and if you buy one from a federally insured bank, you’ll be covered up to $250,000 per depositor, per ownership type.
(k) or another workplace retirement plan
This is one of the simplest methods to begin investing, and it comes with a number of significant benefits that could assist you both now and in the future. Most employers will match a part of your agreed-upon retirement savings from your regular income. If your employer gives a match and you don’t take advantage of it, you’re essentially throwing money away.
Contributions to a typical 401(k) are made before they are taxed and grow tax-free until retirement age. Some companies provide Roth 401(k)s, which allow employees to contribute after taxes. You won’t have to pay taxes on withdrawals during retirement if you choose this option.
These corporate retirement plans are excellent money-saving tools since they are automatic once you’ve made your first choices and allow you to invest consistently over time. You can also invest in target-date mutual funds, which manage their portfolios in accordance with a set retirement date. The fund’s allocation will shift away from riskier assets as you approach closer to the goal date to accommodate for a shorter investment horizon.
As a newbie, how many shares of stock should I buy?
This is a crucial factor to remember, especially for newer investors. Just because you have the ability to purchase a certain number of shares of a stock doesn’t imply you should. For example, if you deposit $1,000 in a new brokerage account and a stock you want to buy trades for $50, you can purchase up to 20 shares.
Don’t forget about portfolio diversification, though. Instead of taking a significant position in one stock, spreading your initial brokerage deposit over a few other firms might be a wiser investment plan.
Most experts advise beginners that if they are going to invest in individual stocks, they should strive to have at least 10 to 15 different equities in their portfolio to diversify their holdings adequately. And, because most brokers no longer charge charges for online stock trades, it’s easier than ever to distribute a small amount of money across a variety of stock positions.
How can you tell if a stock is a good investment?
The price of a stock is the first and most obvious thing to consider. What is the cost of purchasing a share of this company?
It’s vital to remember that pricing should only be considered in the context of other factors. When a company reaches a particular size, it may “split” its shares, lowering the price while increasing the number of shares available. Other corporations don’t split their stock, so a single share could be worth hundreds of dollars or more. However, the price will impact how many shares you can buy with the money you have, especially when compared to prior values. Knowing the price of shares and their history will help you determine if you’re getting a fair deal when purchasing stocks.