At first glance, stock charts appear to be a chaotic show of lines, colors, numbers and acronyms. Once you break them down into individual parts, however, reading them becomes a much more manageable task.
To be sure, knowing how to perform in-depth stock analysis isn't a requisite for starting to invest (learn how to invest in stocks; no technical analysis required). But understanding the basics of stock charts can help you make investment decisions more confidently.
Stock chart components
One of the most convenient ways to learn about stock charts is through Google Finance. Just search a company’s ticker, and you’ll see a simple chart that’s the equivalent of the shallow end of the pool during a swim lesson. (Don’t know the company’s ticker symbol? You can search online for that.)
As an example, let’s look at Apple (AAPL), currently the largest stock by weight in the S&P 500.
This chart shows the stock price was $125.12 at the market close on March 2. Closing price refers to the last price a stock traded for during regular market hours — 9:30 a.m. to 4 p.m. Eastern Time. During regular trading hours, the price will likely fluctuate. The “after hours” price is $125.15, reflecting the price the stock was currently being traded for outside of regular hours. (Learn more about after-hours trading, and why it’s not the best idea for beginners.)
We can also see the stock price “closed” $2.67 lower than it did on the previous trading day (when the close price was $127.79), meaning the price fell by 2.09%. The red line shows the various price changes throughout the day, but choosing any of the other time periods would show the various price changes throughout that period.
That line, denoting price increases and decreases over a specified period of time, makes up the backbone of most stock charts. The y-axis (vertical axis) shows prices in dollars, while the x-axis (horizontal axis) shows how much time has passed in the chosen period. In this chart, the gray line shows how the stock is performing during after-hours trading.
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Basic stock chart terms to know
Open, high, low and previous close. The open is the first price at which a stock trades during regular market hours, while high and low reflect the highest and lowest prices the stock reaches during those hours, respectively. Previous close is the closing price of the previous trading day.
Market cap. Shown here as “Mkt cap,” market cap means market capitalization, which measures the size of a company based on the number of its shares on the stock market multiplied by its current share price. In Apple’s case, your eyes do not deceive you: That’s a market cap of $2.1 trillion — one of the largest in the world. (Learn more about market capitalization.)
PE ratio. This stands for price-to-earnings ratio, which some investors may use to decide if a stock is undervalued, overvalued or fairly valued. (Get the details on PE ratio.)
Dividend yield. Shown here as “Div yield,” dividend yield tells you how much an investor may receive annually in dividends (cash payments companies may offer to shareholders), expressed as a percentage of the current share price. Apple’s quarterly dividend for the past four quarters was $0.2050 per share. Multiply that by 4 (for a full-year dividend) and you get $0.82, which is 0.66% of its current share price of $125.12. (Learn more about dividends.)
52-wk high and low. 52-week high is the highest price the stock has traded for during the preceding 52 weeks, while the 52-week low is (you guessed it) the lowest price the stock has traded for during the preceding 52 weeks.
More advanced stock chart terms
Google’s charts are pretty bare-bones, making them a great place to learn. But once you start studying more advanced charts, you’ll run into a few more terms worth knowing.
Bid and ask
The bid is the highest price an investor is willing to pay for a stock. If you see, for example, $124.61 as the bid, investors are currently willing to buy the stock at a price of $124.61 per share. The ask, on the other hand, is the lowest price an investor is willing to sell a stock for. If you see an ask of $124.65, sellers are currently selling for $124.65 per share.
Note there’s a $0.04 difference between the two — this is called the bid-ask spread. Generally, when there’s high trading activity with lots of willing buyers and sellers, spreads will be smaller. With less trading activity (such as during after-hours trading or trading in less popular stocks), bid-ask spreads may be wider. And when spreads are wider, it may be more difficult for an investor’s trade to be executed, or for the trade to go through at the price they wanted.
Volume, average volume and day’s range
Volume represents the number of shares that have been traded so far that day, while average volume is the average daily volume for a specified period. Day’s range shows the highest and lowest prices the stock has traded for up to the current moment of that trading day.
Beta shows how volatile a stock’s price is compared with the stock market, which may be an indicator of how risky the stock is. If beta is greater than one, the stock has historically been more volatile than the stock market (typically represented by either the S&P 500 or a total stock market index) for the specified period. If beta is less than one but greater than zero, it’s been less volatile than the overall market for that period. As always, though, past performance isn’t indicative of future performance.
EPS (TTM) and earnings date
EPS (TTM) stands for earnings per share for the last 12 months (or, technically, “trailing 12 months”), and that number is the “E” in PE ratio. You can get this number by dividing the most recently reported company earnings by the number of the company’s shares available on the stock market. The earnings date is the publicly displayed window of time for when the company will announce its latest quarterly earnings.
In order to receive the company’s dividend for the next period, you’ll have to become a shareholder (that is, buy its stock) before the ex-dividend date. If you buy the stock on or after the ex-dividend date, you won’t get the dividend for that period. As far as dividends go, procrastination doesn't pay.
1-year target estimate
This is an estimate of what the stock’s price could be in one year. This reading often represents a consensus of many analysts’ one-year price targets, but be aware that while analysts use complicated calculations to arrive at their estimates, it’s still just a forecast. And as anyone who’s been annoyed with their local meteorologist knows, forecasts can be wrong.
As you continue learning about stock charts, keep a few points in mind:
It’s rare for a stock to move in one direction. Swings are normal.
What appears to be a big spike or slump may not be. Look at the y-axis; prices may range from a few cents’ difference to a few dollars, depending on the stock.
Even if a stock price is rising in the short term, that increase may be a blip amid a prolonged decline. Look at longer time horizons (one, three and five years) for a more complete picture of trading activity.
Not all charts will be right for your time horizon. Poring over an intraday price chart, which looks at one day’s fluctuations, won’t make sense for someone who plans to be invested for 20 years. A day trader, however, may find it helpful.
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.