Before any investor puts serious money in the stock market, it’s extremely important to understand the basics about a stock’s price, value and movement. Fortunately, there’s nearly unlimited data, information and analysis online these days, but investors still need to know where to find that information and how to sort through it all.
Stock charts are one of the most common ways for investors to get a quick snapshot 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 complex technical analysis metrics and patterns in charts may seem overwhelming, but it’s relatively simple to learn the basics of a stock chart:
— Price
— Volume
— Moving Average
— Fundamental Metrics
— Range And Period
— Style
— Indicators
— Compare
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U.S. News & World Report provides basic stock charts for major U.S.-listed stocks. To understand all the components of the chart, here’s a breakdown of each one:
Price: A stock’s price is the primary data point that is plotted in a stock chart. Looking at the current market price of a stock tells an investor the price at which the most recent trade of that stock was completed. However, looking at a stock’s current market price doesn’t provide any information about where its price has been in the past or which direction the stock is trending in. By analyzing a stock chart, investors can get a sense of the past performance of a stock and even identify patterns in the stock’s price movement 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 graph at the bottom of the chart. A stock’s volume can range from zero shares to millions of shares, depending on how liquid the stock is and what its share price is. Large spikes in volume can indicate stock catalysts such as important news from the company, insider or institutional buying or a potential change in a stock’s longer-term trend or pattern. Volume bars in a stock chart are often colored green on days a stock’s price closed higher than its previous day’s closing price and red for days on which it closed lower.
Moving average: A simple moving average, or SMA, is another one of the most basic components of many stock charts and is often included by default. The 50-day SMA and 200-day SMA are two of the most commonly used moving averages, and the 50-day SMA is included in the standard U.S. News & World Report stock chart. The SMA is a line that represents a stock price’s average over a set number of intervals, such as 50 days. Investors use moving averages as a way to “smooth out” the noise in a stock chart and get a better sense of a stock’s longer-term trend.
Fundamental metrics: Stock charts give investors a visual sense 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 U.S. News stock chart. These fundamental metrics include a company’s revenue and earnings per share, or EPS. EPS represents a company’s annual profits divided by its total number of outstanding shares of stock. Price-to-earnings ratio, or PE, is a stock’s share price divided by its EPS. The lower a stock’s PE, the more it may appeal to 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 vastly different perspectives on a stock’s past price action.
The period of a stock chart is the length of time represented by a single data point on the chart. The default period on most stock charts is daily, but traders can also use weekly, monthly or even five-minute periods.
The range of a stock chart represents the number of total periods, or amount of time, included in a chart. For example, U.S. News & World Report stock charts let readers choose from nine different periods, including one day, one month, year-to-date, and three years.
Style: There are also several different common styles of stock charts. Two of the most basic styles are line and area charts. Time is plotted on the X axis of the 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 opening and closing price of the stock and its intraperiod high and low prices. In a candlestick chart, the body of each candle represents the opening and closing 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: Stock traders that use technical analysis analyze historical stock data and attempt to predict future stock movements based on patterns and trends. One way they attempt to time their buy and sell points is by using advanced indicators based on price and volume. The U.S. News stock charts include nine different indicators, such as Bollinger Bands, moving average convergence/divergence and relative strength index, or RSI.
These indicators may be useful to short-term traders, but technical analysis and short-term trading is much more of an art than a science. These indicators are not 100% reliable and can be extremely ineffective at times.
Compare: The final element of the U.S. News stock chart is the compare 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).
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How to Read a Stock Chart originally appeared on usnews.com
