How to Read Stock Charts

Learning how to read stock charts is an important skill to have when it comes to picking which stocks to invest in. It tells you how healthy the company is, and how much future growth potential the investment is likely to have.

How to Read Stock Charts

1. Trend Lines
2. Dividends and Stock Splits
3. Line and Bar Charts
4. Candlestick Charts
5. Historic Volume
6. Price to Earnings

Reading a chart is a basic skill in most ventures that requires looking at data from the past and making decisions about what to do moving forward. Your doctor has a chart on your personal health, for instance. Some of that chart is just scribbles that only he or she can read (as the joke goes). but some of that chart actually contains useful data, mapping out your height, weight, blood pressure, and other metrics to make sure you are staying on track with your health. This chart helps your doctor make action plans both in terms of preventative ongoing care, and how to deal with acute medical incidents.

The same is true (in basic principle) with a stock chart. The basic purpose of a stock chart is to let you know how a given stock is performing, in the past and even in real time. If you are an investor, you can use this information to make a decision moving forward—such as knowing when to buy, sell, or hold a given security.

Stock charts can be found on search engines like Google and Yahoo. They can also be found on trading platforms like Robinhood, Merrill, and TD Ameritrade.

What is a Stock Chart?

Generally speaking, the basic layout of a stock chart displays dates or times on the horizontal vector and prices on the vertical vector. In this way, you can see how the price has changed over the course of any given time period. Typical time periods include the current day, the past five to seven days, the past month, past three months, past year, and past five years. Some charts will also let you input customized ranges, such as a lifetime chart.

At the bottom of the chart there is usually a number of statistics displayed, including open, high, low, market cap, P/E ratio, dividend yield, earnings per share (EPS), 52 week high, and 52 week low. In recent times, some platforms have added metrics like the CDP score, which stands for carbon disclosure rating. This metric comes in response to increased investor demand about environmental accountability and sustainable investing.

What all these different measurements mean can be a bit difficult to parse out if you are unfamiliar with how the stock market works, but they are also really easy to learn about. And once you understand them, you are in a much better position to make educated investment choices.

Of course, anytime you hear or see any kind of commercial about participating in an investment, the advertiser is required to remind you that past performance is not indicative of future results. That is certainly true, but it is reasonable to build operating assumptions on the data you have available, in consideration with other related factors such as the inherent nature of the business and its market demand.

For example, you can be reasonably sure that companies producing consumer staples, like food, beverages, medicine, and paper goods, are always going to have a demand for their products.

9 Stock Chart Terms to Know

The terms that follow will help technical analysts look at financial markets and read what is going on with any given security. But you don’t have to be a technical analyst to benefit from knowing these basic metrics.

Knowing how to read a daily chart of a stock’s performance, as well as a yearlong or five-year long chart of its performance can help you assess whether or not it’s a good investment on a steady upward trend, or if despite a not-so-exciting price pattern, it offers solid dividends.

At first glance, the technical analysis of reading a chart pattern may seem difficult. But if you want to venture away from passively relying on the guidance of those in charge of a mutual fund to invest and grow your money, you have to learn how to read stock chart patterns and their key metrics. You can’t always rely on hearsay or Reddit memes. You can, however, conduct something called fundamental analysis to determine if the investment is right for you.

There is nothing wrong with putting your money into a mutual fund. But even if it’s in one, you should still analyze the price movement indicated by line charts and moving averages. At the same time, you will need to learn how to ignore the price action and technical indicators that professional day traders rely on, otherwise you can drive yourself crazy.

Here is a list of stock terms to know in order to learn how to read a stock chart:

1. Open and Previous Close

The open is the stock price of a given security when the market opens. And (as you might guess) the previous close is what the stock price was when the market closed the previous business day. For instance, if you’re looking at a chart on Monday morning, the previous close will show the stock price on Friday afternoon.

Some trading platforms will show you what is happening to stock prices after hours, and even allow you to place trades. However, it is still good to analyze the opening and closing prices of a security. In fact, some analytical software will use these numbers over the course of any given time period to predict what the opening and closing prices or highs and lows will be in the future.

2. High and Low Price

The high and low prices illustrate how high and how low the stock price of a given security went during a given time period. Again, the person reading the graph can set this time period, but typically a standard stock chart will show you the current high and low for that current day.

If you are day trading (that is, buying and selling stocks and holding them only for hours or minutes), this is an important metric to consider because it helps you gauge how volatile a particular security has been that day and its range of movement; which in turn tells you the potential for making a profit.

3. Market Cap

Market cap is the number of outstanding shares of stock multiplied by the price. Market cap essentially shows you the value of a company, since each share of stock is a share of ownership in the company.

The reason market cap is important is because it tells a potential investor or trader the size of the company in question relative to other similar companies, which in turn can help gauge the level of risk involved.

Large cap stocks ($10 billion and up) are issued by companies that have a reputation for quality goods or services, along with a solid history of name-brand recognition, so while there is less room for growth, there is much less risk.

Mid cap stocks ($2 to $10 billion) are typically companies in a growth phase. They have more growth potential, but also more risk should they fail to compete.

Small cap stocks ($300 million and less than $2 billion) have the most potential for growth, but also carry the greatest risk because they are yet unproven companies that might sink in stormy markets or in a battle with a competing company.

4. P/E Ratio and EPS

The price to earnings ratio tells you how much a given stock costs per share in comparison to how much each share earns. Not all stocks issue dividends, so this calculation does not necessarily include them. But regardless of whether or not a company pays dividends, the total amount of profit divided by the number of outstanding shares results in a number (earnings per share or EPS) that can be compared to the price of a given security.

5. Dividend Yield

The dividend yield shows how much a given share of stock pays in dividends as a percentage.

6. 52 Week High and 52 Week Low

As you might guess, this metric shows how high and low a stock price has gone over the past year, dated back from the current day you are reading the chart. While the high and low metrics are particularly useful for gauging a stock’s performance that day, the 52-week highs and lows are much better for gaining a long-term picture of its health. This metric is more beneficial to investors rather than day traders because investors trying to gauge the long term growth of a stock will want a longer timeframe for gauging its volatility.

7. Ex-Dividend Date

As we mentioned before, some stocks pay dividends. Dividends are a portion of the company profits that are paid out to shareholder—such as everyone who owns shares of common stock.

However, in order to reap the benefit of collecting dividends, you need to own the stock by the ex-dividend date. If you purchase the stock after the ex-dividend date or sell it before the ex-dividend date, you are not going to receive the company dividend payout.

8. Beta

Though you may see this term tossed around on social media as an insult, in the stock market beta is just an indicator of how a given security performs against the overall market.

One thing this metric illustrates is how volatile (or not) a given security is. If the resultant beta number is greater than one, this means the stock is more volatile than the general market. And if the resultant beta is less than one but greater than zero, the stock is less volatile than the market in general.

Stocks with a good beta might be, for instance, recession proof stocks attached to companies offering products and services that are always in demand, such as consumer staples and banking.

9. Bid and Ask

The bid displays the highest price an investor is willing to pay for a particular security, while the ask is the lowest price at which an investor is willing to sell the same security. The resulting gap between them, in dollar amounts, is referred to the bid-ask spread.

If there is lots of stock market trading activity going on, the bid-ask spread is going to be smaller because people are looking to buy and sell. If there is not a lot of trading activity, the bid-ask spread will be larger, and that in turn means that it can be harder to execute a trade at the desired price.

One great way to familiarize yourself with these terms is to join one of our weekly Stock Trading Rooms. Each week, our experts deep dive into the latest stock market trends and answer common questions.

How to Read Stock Charts

Now that we’ve covered the key stock investing terms to know, let’s dive into the tactics used for reading stock charts:

1. Trend Lines

Trend lines (or a trendline) involve connecting the dots on stock charts; for instance, the price points over a given time period. It can give a trader or investor a decent idea of the direction a particular security is moving, whether that’s up or down, and how fast that growth is occurring.

To get a little more nuanced, if the chart is showing lower lows and lower highs, this is a downtrend. If it’s showing higher highs and higher lows, this is an uptrend. Uptrends and downtrends can be used to confirm what the trend line is showing in terms of growth.

For an investor considering long term stock gains, a trend line spread out over five years is a great barometer of long term growth. For a trader looking to buy the dip and capitalize on price swings, a trend line connecting the metrics of several hours can show what might be happening the rest of the day.

2. Dividends and Stock Splits

A dividend chart shows you how much a company pays in dividends over a given time period. Since dividends are paid on a quarterly, bi-annual, or annual basis, this chart is going to need to at least show at least 12 months of dividend history in order to be useful.

A dividend chart might look at one stock, or compare it to several others. Usually, dividends are indicated underneath a stock chart as the dividend yield. However, if you have a more advanced membership in a trading platform, they may offer graphs and charts that allow you to compare the dividends of a particular security to others.

Stock splits are charted in a unique fashion. Generally, a blue line will show the old price before the stock split, and it will drop off at a point when the split occurred. A red line (most often) will show the new adjusted stock price, which is going to (most likely) be around half the original price before the split occurred (unless the split involved creating more than two shares).

If you are unfamiliar with what a stock split means, it means that each and every share of common stock is split into two. Companies have different reasons for splitting their stock, but one of the most common reasons is that the stock price has become unaffordable to most investors. In order to generate more interest in buying shares of stock, the company will split each share into two or more shares.

3. Line and Bar Charts

A bar chart illustrates multiple prices: open, high, low, and close (also called OHLC prices). The vertical lines of the bar illustrate the high and low prices for that security at that point in time, whether it’s a day or even an hour. Opening and closing prices are marked by small horizontal lines to the left and right of the bar, respectively. If the opening price is lower than the closing price, the entirety of the bar showing the daily high and low will often be colored green, indicating growth for that given point in time. If the opening price is higher than the closing price, the bar may be colored red. A quick glance at this type of chart and the resultant colors of the bars can give you a snapshot of a stock’s growth patterns over time.

For instance, a stretch of green bars indicates that security is growing every day and moving generally upward. A stretch of red bars indicates that a security is shrinking every day and moving downward in terms of price. A mix of the two will indicate some volatility that may need to be parched out, sometimes by selecting longer or shorter time periods to determine the true nature of the risk of investing.

4. Candlestick Charts

A candlestick chart is very similar to a bar chart. Candlestick charts were first used in 18th century Japan to gauge the price of rice. They are useful for forecasting short term price movements, and often used in forecasting algorithms.

According to some market theorists, the colors of the candlestick chart represent the emotions that drive trading activity. Similar to the bar chart, candlestick charts show OHLC prices (open, high, low, close price). They differ in that the high price and low price are illustrated by vertical lines at the top and bottom of each bar, which appears similar to a wick (hence the name candlestick chart). The body of the candle illustrates the open and close prices. If the open price was higher than the closing price, the real body (as it’s called) of the candle is filled in. If the open price is lower than the closing price, the real body is left empty.

Oftentimes candlestick charts will use red and green colors, just like the aforementioned bar charts, to reflect the highs and lows.

5. Historic Volume

Volume is important because it shows you how much trading activity is going on. Stock prices follow the same laws of supply and demand that anything else does: as demand goes up and supply remains the same, the prices increase. As demand goes down, prices fall.

The volume of trading activity can help a trader gauge whether prices are going to continue to rise or fall because oftentimes volume and price is a self-perpetuating cycle: more traders buy a stock, driving up the price, which makes more people want to buy it. Sometimes this can be part of a pump and dump scheme pushed by unscrupulous investors.

6. Price to Earnings

As mentioned, the price to earnings ratio tells you how much profit a company makes per share. This indicator is actually less interesting to a day trader profiting off hourly stock trading because they are more interested in the raw numbers of mathematical patterns. But a P/E ratio is incredibly important to long-term investors because it tells them whether or not a company is overvalued or undervalued.

Undervalued companies will offer better returns per dollar, especially if they pay dividends. However, that doesn’t rule out the possibility of investing in a company with a higher P/E ratio. That will just require more fundamental analysis to determine if it will be a profitable investment.

Stock Charts Help Predict the Potential of an Investment

Fundamental analysis is the art of looking at a company itself and gauging its health and worth. Warren Buffet is an expert at fundamental analysis in part because he can pick up the phone and reach out to executives to ask how things are going. The technical analysis of reading an intraday chart is great, but for long term investments, it’s good to pair this with a fundamental examination of the actual business.

In some cases, you will be able to do a modicum of this by your own research. For example, a five-year line chart indicating favorable movement for a Fortune500 company, like Walmart or Apple, is probably not going to tell a different story than just looking at the company itself. In other cases, it is difficult to perform that analysis on your own, and may require the help of more qualified financial advisors.

You can learn more about reading stock market charts, as well as the expert-driven strategies behind analyzing them, by signing up for a free Infinity Investing membership. Join today to start your journey to financial freedom.

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