7 Tips for Reading a Stock Market Graph and Why They Matter
You’ve probably walked past it in your office: a stock market graph on a big-screen, informing the finance department and your company’s higher-ups about what financial decisions they need to make. To them, stock charts are keys to understanding the stock market’s ebbs and flows and indicators of how well the company (and its competitors) is performing.
But to you, it’s all a bunch of mumbo-jumbo. What in the world are all those lines, numbers, and “ticker symbols” supposed to mean?
It doesn’t have to be that way — the stock market is not nearly as illusive as you’ve been led to believe. While a stock market chart may seem convoluted if you’re a beginner, learning to read one can help you make wise investment decisions or get a better understanding of how your own company is doing. Here are some basic tips for reading a stock market graph:
Learn Stock Market Graph Basic Terms
Before you dive into reading a stock market chart, take the time to educate yourself about the essential terminology. A few critical terms to know include:
Ticker Symbol: A ticker symbol identifies a particular stock and is usually derived from a few letters of a company’s name. For example, Apple is (AAPL), Microsoft is (MSFT), and Paypal is (PYPL).
Open and Close Price: The open price is the price a stock trades for at the beginning of a new day, and the close price is the price the stock stops trading at the close of regular business hours (yes, after-hours trading is a thing).
Net Change: Net change is a stock’s dollar value change from the previous day’s closing price.
Understand Different Chart Types
There are four common types of stock market graphs:
- Line charts;
- Bar charts;
- Candlestick charts;
- Point and figure charts.
You have likely encountered line and bar charts more often than the others. Line graphs only measure a stock’s closing price, whereas a bar graph shows both opening and closing prices, plus the highs and lows of the day.
It’s important to know what type of graph you’re looking at because they provide you with different kinds of information. If you want to see a stock’s price progression over a period of time but only care about the closing price, then a line graph is for you; if you want to know how a stock performs within a day, then a bar or candlestick chart would be more informative.
Identify and Adjust the Axes
The X-axis usually depicts time, and the Y-axis is generally price. When you’re reading a stock market graph online, try changing the axes to get a better idea of the stock’s patterns. How did it perform over the past week compared to the past year? What about the past five years? You can’t tell if there has been substantial growth if you only look at a stock over a month — that’s not the whole picture.
Monitor the Trend Line
Whenever you pass stock market charts on the big-screen we mentioned earlier, the trend line is probably the most eye-catching part. It’s what tells you whether a stock’s value is rising or falling, and it’s present in all kinds of graphs (it’s the most obvious in a line chart, but you can still identify a “best fit” line in other varieties). If you’re monitoring your company’s or another’s stock value, pay close attention to how dramatically a stock’s price goes up or down (don’t panic if the downturn it takes isn’t significant).
However, the line doesn’t tell you everything. It’s critical to make a note of a stock’s trading volume — that is, how many shares are being traded. If a stock falls by a small percentage, but the volume is below average, then that means larger investors are not being particularly aggressive. Be patient; you’ll notice a significant volume increase if the big investors think it’s a stock worth buying more of.
Pinpoint Support and Resistance Lines
A stock’s price goes up and down all the time, so if you want a more comprehensive picture of its behavior, then you’ll need to identify support and resistance lines. Take a look at a stock market chart — how often does the trend line plummet or rise dramatically? It happens, but not as often as it wavers between two values that are closer together. The lower point is a support line, which is the price the stock usually doesn’t fall beneath. The higher is the resistance line, which the stock’s price tends not to exceed.
Support and resistance lines help you predict a stock’s future behavior more accurately. They give insights into overall trends just as much as the trend line itself. Sure, a stock might go up and down a bit on any given day, but support and resistance inform you when it’s time to panic or get excited.
Look for Dividends
Dividends are payments companies sometimes make to their shareholders. Not all companies do this (that doesn’t mean they’re not worth investing in), but you’ll be able to see when dividends occur on stock market charts, such as in the legend or along the X-axis.
Pay Attention to the News
The stock market is not something that just “is” — it’s made of people making decisions. Therefore, events in the news make a difference. Did a company’s CEO recently quit? Did a product just enter a new international market? Did your own company release an in-demand service? Pay attention to the news so you can discern what factors influence the stock market and whether the event is significant enough to encourage you to buy or sell.
The stock market operates with many rules, but if you learn how to read the critical elements of a stock market graph, you’ll be closer to making better investment decisions and understanding your company’s financial status.