Navigating the waters as a new investor can be a little overwhelming, as there are some basic things you’ll need to learn. One skill you may want to master is how to read stock charts. These charts can offer a snapshot view of how a stock is performing at any given time. If you’re just getting started with investing in stocks, these charts may seem confusing at first glance. But understanding how to interpret them can help with determining which stocks to buy, based on your investment goals. Familiarizing yourself with the basics of stock charts can also help you make sense of stock trading lingo and jargon that might otherwise seem like a foreign language.
Besides understanding stock charts, there are other analytical tools you should use, and a financial advisor can help you find and benefit from these valuable resources.
What Is a Stock Chart?
A stock chart is a graph that illustrates a stock’s movements over time. Specifically, stock charts show you how a stock’s price has increased or decreased.
Stock charts are time-bound, meaning they can offer you a look at how a stock has performed at specific moments in time. It’s common for stock charts to be broken down into these increments to show pricing movements:
- 1 month
- 6 months
- Year to date (YTD)
- 1 year
- 5 years
The max date range shows you a stock’s entire pricing history since the date it was first offered for trading on a public exchange. Looking at the max pricing range can be helpful if you want to see how a stock’s price has trended over its entire lifespan.
What’s Included in a Stock Chart?
Stock charts show you a stock’s price movements obviously. But there are other things that can be included in a stock chart that can tell you more about the stock in question. This is where it’s helpful to understand some terms that are commonly associated with stock charts, including:
- Open. This is a stock’s initial price at the start of the trading day.
- Previous close. This is the stock the priced closed at for the preceding trading day.
- High. The high represents a stock’s highest trading price for the day.
- Low. The low is a stock’s lowest trading price for the day.
- 52-week high and low. The 52-week high and low are a stock’s highest and lowest prices for the most recent 52-week period.
- Volume. Volume is a measure of the number of shares of a stock that are being traded.
- Moving average. A moving average represents the average price a stock trades at over a set period of time.
- Market cap. Short for market capitalization, the market cap is a measure of a company’s valuation based on the number of shares it has outstanding and the individual price of each share.
- Price to earnings (PE) ratio. Price-to-earnings ratio is another measure of value that’s based on its share price, relative to earnings per share.
- Dividend yield. If a stock pays dividends, its stock chart will include the dividend yield, which measures dividend payouts as a percentage of the share price.
What’s included often depends on the type of stock chart being used. The most common types of stock charts include:
- Bar charts. These stock charts track a stock’s opening and closing price, as well as its high and low price for each day.
- Line charts. Line charts track a stock’s opening and closing price only.
- Candlestick charts. Candlestick charts track the same price information as bar charts but they use “shadows” to track upper and lower price movement patterns.
- Point and figure charts. Point and figure charts use Xs and Os to plot price increases and decreases, respectively.
Getting these basics down can help you make sense of how to read stock charts and interpret the information you’re seeing.
How to Read Stock Charts
The first step in reading a stock chart is familiarizing yourself with each of the terms mentioned above. Depending on where you’re reading the chart, the information may be organized differently. So it helps to get your bearings first. From there, you can move on to the more advanced stage of stock chart reading, which involves looking for trading patterns. You can start by identifying the trend line. The trend line on a stock chart is simply a line that connects one price point to another. This line will tell you whether a stock is moving up or down on a given day and how its price has changed over longer periods of time.
Next, you can look at the volume to determine how much trading activity is taking place around a particular stock. Looking at volume and pricing trendlines together can help you understand investor behavior and trends for a stock. Declining prices and increasing volume, for example, could signal a wave of panic-selling. Declining prices and lower volume, on other hand, might suggest that investors are holding onto shares in expectation of a price rebound.
Drawing lines of resistance and support can also offer insight into how investors perceive a particular stock and how that can affect pricing and trading volume. A line of resistance measures a price range that a stock is not likely to move above while a line of support measures a price range that a stock is not likely to move below.
Where you set these lines can depend on how long you plan to hold a stock, your risk tolerance and goals. But the purpose of using these lines to identify trends in pricing highs and lows. This can help you decide on the right timing to buy or sell a stock, based on which way you think the price will move next.
You can also look at moving averages to gauge pricing trends and levels of support among investors. By looking at volume and pricing around key moving average points, like the 50-day, 100-day or 200-day marks, you can see whether investors are buying more of a stock, selling it off or simply holding steady.
The Bottom Line
Stock charts can tell you quite a bit about a stock and its pricing trends over various time periods. They can also tell you how the market as a whole perceives a particular stock and how that’s reflected in trading activity. Keep in mind that knowing how to read stock charts is not essential to building a portfolio and creating wealth over the long term. But it can help you make more informed decisions when it comes to buying and selling stocks.
Tips for Investing
- Consider talking to a financial advisor about how to read stock charts and how to use them to guide your investment decisions. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
- If your investments pay off, you may owe the capital gains tax. Figure out how much you’ll pay when you sell your stocks with our capital gains tax calculator.
- Stock charts can be found online and many online brokerages make them available to traders. If you’re planning to open a new brokerage account, consider the range of stock charts and analysis tools offered. Also, pay attention to the fees you’ll pay to invest. More brokerages are offering commission-free trading for U.S. stocks and exchange-traded funds (ETFs) but some still charge trading fees. So consider how much you’ll pay to buy and sell shares, as that can affect your overall return profile.
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