Mastering the stock market seems simple: Buy stocks at low prices, sell when they’re high. But if it were all so easy, billionaire investor Warren Buffett would be just another octogenarian from Omaha, Nebraska.
There’s a wealth of resources available to help investors navigate the stock market, including a trove of data and charts. Making sense of that information? Well, that can take practice. Here are some tips to help you understand these tools.
People new to the markets often try to emulate another person’s investment strategy, which can produce the euphoria of a quick buck or the despair of losing money. Entering the market this way is not ideal.
Instead, take time to educate yourself on the basics and dive in on paper first. Simulate buying a particular stock and track its performance for the next few weeks, recommends Frank Cappelleri, executive director at Instinet, an electronic trading firm. By conducting this type of analysis with a handful of stocks, would-be investors can experience the ins and outs of trading without the risks.
“This will help you gauge how you’ll react to a move in a stock price and to recognize your risk tolerance,” Cappelleri says.
As part of that education, familiarize yourself with stock charts. Look up any stock online and you’ll likely see charts with a squiggly line that indicates prices (y-axis) over a specified time period (x-axis). The default view often shows one day’s activity, but others may show movement over a few days.
When analyzing charts, bear 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 likely isn’t. 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 (three months, one year or 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.
Once you get accustomed to reading charts, you can add numerous indicators (such a stock’s 200-day moving average, which shows how prices have trended while averaging out aberrations) online. But avoid letting these create more noise in your research.
“You have to recognize what’s comfortable for you or else you may think you know more than you do,” Cappelleri says. “A simple approach often is better.”
See the section on data below for some of the key metrics you might use for evaluating stocks.
Don’t become obsessed with charts when starting out. On Wall Street, chartered market technicians — of which Cappelleri is one — spend their days engrossed in charts, piecing together a narrative of what’s happening in the market. And even they can fool themselves.
Common chart terms
Open and closing prices: The prices at which a stock trades the first time when U.S. markets open (9:30 a.m. Eastern time Monday through Friday) or the final time when markets close (4:30 p.m. Eastern).
52-week range: The range between the highest and lowest prices a stock has traded over this time frame.
Volume: The number of shares that changed hands in a given time period.
Decide which data matter to you
Price is usually the determining factor for buying or selling a stock, but many people use other data to inform their decisions.
As with charts, there’s a seemingly endless supply of data, but more information doesn’t necessarily make the process easier. Consider the context for any data you uncover. If you read that a particular stock is overvalued, based on its price-earnings ratio for example, dig deeper to learn how the current level compares with the stock’s history and other stocks in the same sector or industry.
Common stock data terms
Market cap: Market capitalization, or the total number of a company’s shares multiplied by its current price.
EPS: Earnings per share, which is a measure of a company’s profitability.
P/E ratio: Price-to-earnings ratio, a metric for valuing a stock.
Dividend: A portion of company profit that is distributed to shareholders.
Dividend yield: A ratio indicating a company’s dividends relative to its share price.
As you venture beyond the basics when making investment decisions, make sure you understand the metrics you decide to use. You can add elements to your process as you become more comfortable. Ready to get started? Learn more about how to buy stocks.
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