The stock market, once considered by the masses to be the mysterious man-behind-the-curtain of the world’s economy, is more accessible than ever. The emergence of app-based trading platforms has put investment into the hands of consumers (literally). For those looking to invest on their own, the first—and often most crucial—step is to learn how to read stock charts properly. Here’s a rundown of stock market graphs and how the average investor can read them.
- Stock charting tells you the history of the stock, in intervals as small as one minute or as large as years (depending on how long the stock has been public).
- That long line that goes from left to right on the chart is called the trend line. It indicates when, and by how much, a stock either rose or fell in price.
- Large investment banks and hedge funds control most of the ebbs and flows of the market, so it’s important to consider the volume of the stock as well as the price.
- Indicators running along the bottom of a chart signify important events in the stock’s history, like when a dividend is issued or when an earnings report comes out.
- While it’s a critically important skill to have, knowing how to read stock charts is only one part of a successful investing strategy.
What is a stock chart?
In its most basic definition, a stock chart is a simple line graph that shows the ebbs and flows of a stock’s price and volume.
These stock market graphs are often supplemented by other important information, such as the stock’s ticker symbol, opening price, closing price, and what exchange the stock trades on. These stock charts are updated on a rolling basis during trading hours, which are from 9:30 AM to 4:00 PM EST.
Key parts of a stock chart
This chart includes other important information, like:
- Ticker symbol: A stock’s ticker symbol is what traders and investment firms use to refer to the stock when buying and selling. While most U.S.-based companies have ticker symbols that are four letters, these nicknames can be as little as one letter, such as Visa (“V”), Ford (“F”), or AT&T (“T”).
- Exchange: Each stock trades on a particular exchange. The most popular American platforms are the New York Stock Exchange (NYSE) and the Nasdaq Exchange.
- Time period: Investors can view stock charts in different time intervals. These intervals can be as small as one minute or as large as the stock’s entire history (in years). The most commonly used periods are daily, monthly, and quarterly. Depending on your investment strategy, each period serves a different purpose for analyzing a stock’s performance.
- Pricing data: Yes, a stock chart in and of itself is all about the pricing data on the underlying stock. To make things a little bit easier on investors, some important prices are highlighted in the chart for easier identification. These prices include the stock’s opening and closing prices, highs and lows for the day and a 52-week period, and more. Also, you can see the stock’s overall change in price for the day, both in dollar amount and percentage change. This change will be either positive or negative.
- Volume: This piece of a stock chart often goes unnoticed by amateur traders and investors, which can be a big mistake. Running along the bottom of the chart, a stock’s volume is important in indicating large buying and selling occurrences by big investors, like banks and hedge funds. For proper analysis, a stock’s price and volume should be looked at together.
How to read a stock chart
Reading a stock chart isn’t too far off from reading basic graphs like you did in middle school.
The first step in learning how to read a stock chart will be to identify what is referred to as the trend line. In the simplest terms, this is the line that goes from left to right across the graph. The higher the line goes, the higher the stock’s price is. The lower the line, the lower the price. Simple enough, right?
The next step is to guide your eyes to the bottom of the stock chart, where you’ll find a bar graph. This graph indicates the volume of stocks being traded in whatever time period you’ve selected your chart to show. The higher the bar, the more stocks were sold at that moment. Volume is an important factor to consider when looking at which stocks to invest in, as higher volumes will mean you’ll likely have an easier time buying or selling your desired stock.
While there’s often a correlation between a stock’s price and the volume at which it’s being sold, this correlation isn’t guaranteed. If you see a discrepancy between the volume and the price, or if something else piques your interest, you’ll want to do your due diligence by researching the company and stock.
Related: How to know if a stock is risky
Identifying events in a stock chart
One of the biggest moments in a stock’s lifespan—and one of the easiest to identify—is when the stock begins trading. This is called the initial public offering (IPO). The IPO marks the first time that shares in the company can be bought and sold by the public.
If you’ve paid attention to the market at all in 2020, you probably know all about IPOs. It’s the biggest IPO year on record, with companies like Snowflake, Doordash, and Airbnb going public in what feels like one fell swoop (and at a massive scale, no less).
Related: Direct listings vs. IPOs
Investors can actually identify large spikes in volume and correlate that with big company news, like leadership change, profit margin shift, or other catalytic events. The market tends to have an adverse reaction to change, with many investors becoming worried and selling off their shares in response to news.
When charting stocks, financial analysts won’t call these events out in the graph, which is why it’s so important to do your own research.
Other large, planned events for a stock can be found with indicators that run along the bottom of the line graph. Depending on what service produced the stock chart, there might be a “D” to indicate that dividends were issued on a certain date, or an “E” to signify when the company released their quarterly earnings report.
Stock charting tells the story of a stock’s life. When using stock charts as a resource, you can find everything from what exchange a stock is traded on to what its highest selling price of the year was. For many, understanding how to read stock charts is the first step in learning how to follow the markets. In the end, you’ll be one step closer to making your money work for you.
It’s important to remember that not any single part of a stock chart should govern your investing decisions. Aside from the various information points within the graph itself, you should also develop an investing strategy that consists of other research on the company you’re looking to invest in. By doing this, you’ll be setting yourself up to make successful investing decisions time and time again. That’s exactly why so many experts say to invest in what you know.