Do you want to buy a stock, but have no idea how to read a stock chart? Investors seeking an edge and the best chance of making a profit when they’re stock-share trading might look at a stock and trading chart. At a quick study, these pictures of the net change in stock price over time can give the investor useful analytical tools when sifting through company names.
Understanding stock-chart reading basics is important for all investors, not only technical stock analysts — or those who study charts and stock patterns in order to predict future stock prices. Once you find a stock with good fundamentals — such as strong sales and earnings growth — you might examine the stock chart to determine the best time to push the “buy” button.
How to Read Stock Charts
You can learn how to read stocks by drilling down into Apple’s six-month chart from Investor’s Business Daily.
No. 1: Stock Price
No. 1 on the above chart highlights the stock price. When investing, price matters. Invest at too high a price and even the greatest company is a poor investment. Investors buy and sell stock shares throughout any given day. That means that the stock sells for various prices each day.
This fact is represented by the vertical bar at the intersection of the price and date. The bisecting horizontal bar tells you what price the stock sold for at the end of the day. The top of the vertical line is the high price for the day. The bottom of the vertical line is the low price for the day. Technical stock pickers like to see upward stock price trends.
No. 2: Volume
The vertical lines at the bottom of the line in No. 2 tell you how popular that stock is on any given day, or how many shares of the stock traded. Blue bars mean the stock’s price was up from the prior day, whereas red bars mean a drop in price. That red line over the top shows the average trading volume for the last 50 days. Investor’s Business Daily explains that large institutions buying and selling shares typically drive volume. The combination of upward price movement and strong volume might predict a stock price increase.
No. 3: Average Stock Price Over 50 Days
In No. 3, the red moving average line — trending upward, then flattening out — represents the average stock price during the prior 50 days of trading. This line gives investors an idea of the stock price trend.
No. 4: Average Stock Price Over 200 Days
The black line is called the 200-day moving average and calculates the average stock price during the preceding 200 days of trading.
This is another line that provides an idea of the trend in stock price. According to John Murphy of the StockCharts website, a moving average line shows the direction of a stock price trend line. Technical investors seek an upward trend when buying a stock.
No. 5: Stock’s Relative Strength
The wiggly blue line is called the stock’s relative strength, and it compares the stock price with that of the market as represented by the Standard & Poor’s 500 index. Upward movement means the stock is performing better than the market. Downward movement means the price performance is worse than the S&P 500. Chart patterns with an increasing relative strength are a signal of overall strength, and technical stock traders consider this a buy signal.
Check Out Stock Chart Fundamental Factors
Fundamental stock or equity investors consider factors other than price trend lines, averages and volume when investing. Fidelity’s website describes fundamental analysis as a “method of valuing a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.”
This one-year stock price chart from MSN shows the stock price for the last year on top, with important information about the fundamentals below. Notice the company name — Apple Inc. — and the ticker symbol — APPL — at the top, followed by the price chart. Directly below the price, you can find a lot of information, including:
- Stock options
- Dividend per share
- Annual price range
Below the chart is a handy list of important fundamental factors: PE ratio, dividend yield, shares outstanding and more. Fundamental investors seeking high dividends, small or large companies, or low price earnings ratios will find this information helpful.
Investor preferences abound; some investors prefer dividend stocks, whereas others seek fast-growing, small-cap stocks. Knowing how to read stock charts can be useful, regardless of your investing style or the types of stocks you prefer. Although it might take more than one minute to perform a thorough stock analysis, you can execute a quick stock study by understanding a few basic chart features.