When researching stocks, a graphic stock chart is a great place to start. At a quick study, these pictures of the net change in stock price over time can give investors useful analytical tools when sifting through company names.
Stock-chart reading basics are important for all investors, not only technical stock analysts — or those who study chart patterns to predict future stock prices. Once you find a stock with good fundamentals — such as strong sales and earnings growth — knowing how to read charts can help you avoid mistakes common with rookie investors.
How Do You Read the Stock Market?
The amount of information presented in a stock quote — dividend yields, trading volume and PE ratio — can seem mind-boggling to a novice investor. Each piece of the stock quote, however, tells an investor something about the company and is vital in making an investment decision. Here’s an overview of what you need to know to read the stock market.
What Is a Point Worth in the Stock Market?
Each stock point is worth one dollar. When stocks lose a certain amount of points, they are actually losing a certain amount of dollar value. How impactful a point drop is to a stock depends on how high the stock’s share price is.
For example, a stock worth $18 that experiences a six-point drop would suffer a larger percentage drop in share price than a stock worth $118 would.
Cover the Basics: This Is How Stock Options Work
How Do You Read the Stock Market Ticker?
You can easily look up a company’s ticker symbol on the Nasdaq website or via your favorite search engine. A ticker symbol is a one-to-five-letter code used to identify a company. Ticker symbols were originally printed on a ticker tape machine during the early 20th century.
How Do You Read a Stock Graph?
You can learn how to read stocks by drilling down into Textron’s six-month chart from Investor’s Business Daily. Use the numbered chart and descriptions to learn what each point on the chart means.
No. 1: Stock Price
No. 1 on the above chart highlights the stock price. When investing, price matters, and you never want to invest at too high a price. Investors buy and sell stock shares throughout the day at various prices.
Stock sales are represented by the vertical bar at the intersection of the price and date. The bisecting horizontal bar indicates the price the stock sold for at the end of the day. The top of the vertical line is the high price for the day, and the bottom of the vertical line is the low price for the day.
The markers are important because they show price trends — and many technical pickers look for 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, and red bars indicate a drop in price. The 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 share trading 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
Another way of looking at trends, the black line is called the 200-day moving average and calculates the average stock price during the preceding 200 days of trading. 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 S&P 500. 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.
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.
Valerie Ashton contributed to the reporting for this article.