How To Read A Stock Chart | Investment advice
Before an investor seriously invests in the stock market, it is extremely important to understand the basics of a stock’s price, value, and movement. Fortunately, there is an almost limitless amount of data, information and analysis online today, but investors still need to know where to find this information and how to sort it.
Stock charts are one of the most common ways for investors to get a quick overview of what’s going on with a stock. Stock charts come in several different styles and can be extremely complex depending on the amount of information included. Understanding the complex technical analysis metrics and patterns in charts can seem overwhelming, but learning the basics of a stock chart is relatively simple:
- Moving average
- Fundamental Metrics
- Range and period
US News & World Report provides basic stock charts for major stocks listed in the United States. To understand all the components of the chart, here is a breakdown of each:
Price: The price of a stock is the primary data point plotted in a stock chart. Examining the current market price of a stock tells an investor the price at which the most recent trade in that stock was made. However, looking at a stock’s current price does not provide any information about how its price has moved in the past or the direction in which the stock is moving. By analyzing a stock chart, investors can get an idea of a stock’s past performance. stock and even identify stock price movement patterns that could potentially be used to predict future price action.
Volume: The other very basic metric that is included in most simple stock charts is volume. Volume is simply a measure of the total number of shares of a stock that are traded in a given period. A standard daily stock chart often has daily volume included as a bar chart at the bottom of the chart. The volume of a stock can range from zero shares to millions of shares, depending on the liquidity of the stock and its price. Large spikes in volume can indicate action catalysts such as major company news, insider or institutional buying, or a potential change in a stock’s long-term trend or pattern. Volume bars in a stock chart are often colored green on days when a stock’s price closed higher than the previous day’s closing price and red on days when it closed lower.
Moving average : A simple moving average, or SMA, is another of the most basic components of many stock charts and is often included by default. The 50-day SMA and the 200-day SMA are two of the most commonly used moving averages, and the 50-day SMA is included in the standard US News & World Report stock chart. The SMA is a line that represents the average of a stock’s price over a set number of intervals, such as 50 days. Investors use moving averages to “smooth out” the noise in a stock chart and get a better idea of a stock’s long-term trend.
Fundamental Metrics: Stock charts give investors a visual idea of a stock’s movement, but they also often include a breakdown of a company’s underlying business. Readers can access some of these basic fundamental metrics by clicking on the “Company Vitals” tab above any US News stock chart. These fundamental metrics include a company’s revenue and earnings per share, or EPS. EPS is a company’s annual earnings divided by its total number of shares outstanding. The price-to-earnings ratio, or PE, is a stock’s price divided by its EPS. The lower a stock’s PE, the more it can attract value investors. Other fundamental metrics include debt-to-equity ratio, operating margin, and enterprise multiple.
Range and period: Two important elements of analyzing a stock chart are the range and period of the chart. By adjusting the range and period of the chart, investors can get very different perspectives on a stock’s past price performance.
The period of a stock chart is the duration represented by a single data point on the chart. The default timeframe on most stock charts is daily, but traders can also use weekly, monthly, or even five-minute timeframes.
The range of a stock chart represents the total number of periods, or duration, included in a chart. For example, the US News & World Report stock charts allow readers to choose from nine different time periods, including one day, one month, one year to date, and three years.
Style: There are also several common styles of stock charts. Two of the most basic styles are line and area charts. Time is plotted on the X axis of line and area charts, and stock price is plotted on the Y axis.
Bar charts and candlestick charts provide investors with additional information about the stock’s opening and closing price and its intra-period highs and lows. In a candlestick chart, the body of each candle represents the open and close prices and the “wicks” or “shadows” represent the intraperiod highs and lows. In a bar chart, the intraperiod trading range is represented by a vertical line. The opening price is represented by a notch extending to the left of the line, and the closing price is represented by a notch extending to the right.
Indicators: Securities traders who use technical analysis analyze historical stock market data and attempt to predict future stock movements based on patterns and trends. One of the ways they attempt to time their buy and sell points is through the use of leading indicators based on price and volume. US News stock charts include nine different indicators, such as Bollinger Bands, Moving Average Convergence/Divergence, and the Relative Strength Index, or RSI.
These indicators can be useful for short-term traders, but technical analysis and short-term trading is more of an art than a science. These indicators are not 100% reliable and can sometimes be extremely ineffective.
Compare: The last element of the US News stock chart is the comparison feature. Many basic stock charts allow users to include multiple stocks or other assets in a single chart to directly compare their price action. Users can compare a stock to a benchmark index, such as the S&P 500 or the Dow Jones Industrial Average. They can also choose to compare a stock’s performance to an exchange-traded fund, such as the ARK Innovation ETF (ticker: ARKK) or the Energy Select Sector SPDR Fund (XLE).