Money Matters

Ultimate Guide on How To Read Stock Charts

Analyze how companies are performing and decide which stocks to invest in. Here's everything you need to know.

Stock charts are useful when performing technical analyses of publicly traded stocks. The stock market is constantly fluctuating and therefore requires frequent observation, but reading stock charts can seem daunting. Often, investors will use advanced metrics to analyze certain aspects of a stock's qualities. 

When used correctly, the analysis of stock charts can be useful for investors and can lead to profitable trades in many instances. 

This article will cover:

  1. The metrics you should understand when reading a stock chart
  2. The 3 most common types of stock charts
  3. How to effectively read stock charts

The Metrics: What Do They All Mean?

Understanding stock chart metrics can help investors make informed investment decisions since each metric has its flaws. Applying these fundamental metrics effectively may be a fluid process in which an individual has to learn what works best for them and for the stock they're investing in.

This section will reference Facebook’s stock chart on Yahoo Finance (ticker symbol: FB) on October 21st, 2021 to contextualize each metric and make it slightly easier to understand:

Open and Close Prices

Retail investors usually only invest during the trading day. Each stock exchange has the freedom to set its own parameters, but the exchange will close at some point in the day and most investors will no longer be able to trade. The price at which the stock is trading when the exchange closes for the day is called the close price.

However, some investors may still trade after hours and may increase or decrease the price of the stock overnight. Once the stock is tradeable again the next day, it will be available at a different price than it was at closing, this is called the open price.

Reading Facebook's stock chart...

As you can see, Facebook’s stock had a closing price of $340.78 which decreased to an opening price of $340.27 by the following day, most likely due to transactions placed in the after-hours trading window.

Bid and Ask Prices

Bid and ask prices are available for every publicly traded company:

  • The bid price represents the highest value someone is willing to pay for the share
  • The ask price represents the lowest anyone is willing to sell the share for 
  • The difference between these two values is called the spread. 

Generally speaking, if the bid price is higher than the ask price, investors are more willing to sell the stock than they are to buy its shares — the price of the stock is likely to fall. If the ask price exceeds the bid price, then the stock price is likely to rise since the desire to buy is higher than the desire to sell.

Reading Facebook's stock chart...

As you can see in the image above, the bid and ask prices for Facebook’s stock are very close and therefore quite comparable. This means that the willingness to buy the stock is very close to the willingness to sell, and therefore the stock likely will not fluctuate greatly in either direction (as of right now).

Day's Range

The day's range displays a stock's highest and lowest trading prices of the day.

Reading Facebook's stock chart...

On October 21st, Facebook's highest trading price was $342.31 and its lowest was $337.80.

52-Week Range

The 52-week range displays the highest lowest trading prices on the stock over the last 52 weeks.

Reading Facebook's stock chart...

Evident in the image above, the lowest price Facebook’s stock was traded at in the last 52 weeks, was $244.61. In turn, the highest value it was traded at this time was $384.33. Therefore, the stock’s price has fluctuated between roughly $245 and $384 over the last 52 weeks.

Volume

Trading volume measures how many shares of a particular stock the market is trading. Fluctuations in volume may indicate the possibility of changes in asset value. 

An example with Nike
For example, the daily chart of Nike's public trades may demonstrate a recent uptick in volume trading on that asset, though the price has not risen much. Armed with this knowledge, an investor may look into Nike's recent company transactions and determine that the company has decided to sponsor a new league, and the increase in volume comes as a result of the anticipation that the deal will incur positive returns. It is also possible to analyze fluctuations in trading volume over time.  Take Nike's situation as an example again; investors may see that the sponsorship deal was only speculative. Once the trade volume starts to diminish, this may signify that the deal fell through, and the investor may choose to jump ship. Again, like the other metrics, trade volume should be carefully contextualized to be utilized effectively.

Reading Facebook's stock chart...

Facebook's volume in the above chart reveals that 14,956,140 shares were traded during the trading day.

Market Capitalization

Also known as market cap, this metric is used to determine the value of a company’s outstanding shares. Essentially, this metric encompasses every share of stock an organization distributes and adds them all together.

In order to calculate this total, you must multiply the value of one share times the total number of shares that are available for trading. If there are 100 shares of company X’s stock and they trade at $10 each, that means the company’s market capitalization is $1,000 (100x10). 

Reading Facebook's stock chart...

Facebook’s market capitalization value as of October 21st is $963.91 billion. This means that the value of all of Facebook’s outstanding shares is equal to this amount.

Beta

A stock’s beta indicator measures its volatility in comparison to the market, which can indicate how risky a stock is. If beta is greater than one, the stock has historically been more volatile than the stock market. If beta is less than one but greater than zero, the stock has been less volatile than the market.

Reading Facebook's stock chart...

Facebook’s beta value in the image above is 1.32, so it has been more volatile than the entire stock market during this period.

P/E Ratio

P/E, or price to earnings ratio, is a financial ratio that analysts use to measure a stock's performance. The ratio may help investors determine whether a stock is over or undervalued.

In other words, the ratio compares a company's share price to the company's earnings per share:

  • A high P/E may indicate that investors are willing to pay high costs because of the anticipation that returns will soon come. However, high P/E ratios may also mean that investors are paying too high a sum for a share in the company. 
  • A low P/E could indicate good value for a future uptick in price, or that a company's stock is not valuable and investors are deterred from investing for some reason. 
An example of adding context to a P/E ratio
Seeing a high P/E ratio may not be enough to determine investment in a company is worth it. However, when analyzed next to the extremely high volume of trades and release of new company products, you may contextualize the high P/E as an indication that investors are willing to pay higher prices because of the potential value of the stock down the road.

Reading Facebook's stock chart...

Facebook’s P/E ratio in the above summary is 25.39 which is generally considered to be on the higher side.

EPS

EPS stands for earnings per share of a particular company. You can calculate it by dividing the company’s earnings by its total shares outstanding. This figure should be observed over time to see how it is trending.

Reading Facebook's stock chart...

In the above image, Facebook's EPS is 13.47.

Earnings Date

The earnings date is the next date that the company will release its quarterly earnings.

Reading Facebook's stock chart...

In this image, the earnings date is October 25, 2021 — this is the date that Facebook will release its Q3 earnings for 2021.

Forward Dividend & Yield

This refers to the company's projected annual dividend. It's calculated by taking the most recent dividend payment per share and annualizing it. Investors can compare this yield to other stocks as well as the market as a whole.

Reading Facebook's stock chart...

Facebook's forward dividend & yield is N/A because Facebook does not pay dividends to its shareholders.

Ex-Dividend Date

This is the date by which you must invest in order to be paid dividends.

Reading Facebook's stock chart...

Because Facebook doesn't pay dividends, this date is also N/A.

1y Target Est

This is the price a stock is predicted to be 1 year from now. Although the prediction is calculated by professional analysts, the accuracy rate isn't very high.

Reading Facebook's stock chart...

In the above image, Facebook's 1 year target estimate is 418.02.

Charts Used to Present this Information

Bar Charts

Bar charts often indicate an asset's open, close, high, and low price over a given period of time. These charts are visualizations of company performance and can be used in many ways.

Namely, bar charts may depict the performance of a stock by tracking the fluctuations of its share price. In addition, bar charts can also portray changes in volume within a trading day. Whether you are analyzing stock trading volume, price changes, or any other performance indicator, bar charts can be a simple way to represent a body of data.

Below is an image that demonstrates how these bar charts are presented:

Candlestick Charts

Candlestick charts are similar to bar charts in that they display changes in asset value. They earned their name for the apparent reason that they look like candlesticks.

Green candlesticks represent positive growth in a given metric, and red candlesticks represent negative growth. For instance, a red candlestick may be generated in an algorithm that predicts future prices because the stock is likely to correct after a significant gain. Red and green candlesticks often precede each other since no stock will fall or rise forever without correction.

Below is an image of a candlestick chart:

Line Charts

Line charts can be most effective when used to represent growth or contraction over time. Therefore, it is common to find line charts when analyzing moving averages and past performance since they easily depict fluctuations of any magnitude over a given time frame.

Line charts are often depicted as such:

How to Read a Stock Chart

Moving Average

Moving averages allow investors to measure trends in the average performance of a stock's price.

If the average price of a stock has increased over a given period of time, this may tell investors that some aspect of the business is causing an increase in value in the asset. And, vice versa if the average price of stock seems to be decreasing.

The following image displays the 50-day and 200-day moving average of Facebook’s publicly traded stock:

The current price of Facebook’s stock is $340, as of the time this picture was taken. This means that, on average, it is less valuable than it has been over the last 50 days, and just as valuable as it has been over the last 200 days.

Trend Lines

When analyzing a stock's price fluctuations, trend lines provide a line of best fit for increasing or decreasing trends in stock price. In other words, trend lines reveal steady progressions over a specific time, whether positive or negative. 

Trend lines can help identify outstanding performance in a given direction. Once identified, investors can analyze why the uptrend or downtrend is happening. For example, if Apple's stock (AAPL) demonstrates an uptrend, investors may notice the release of a new iPhone affecting price movements. The investor can use this evidence to invest when they hear rumblings of the next iPhone release.

Below is a chart showing Facebook’s stock performance over a month in 2021:

The trend line indicates that the stock has grown over 18% in that time period. 

Chart Patterns

Chart Patterns can reveal a lot of valuable information when reading stock charts. Trading days often entail numerous fluctuations in stock price and volume. By searching the ticker symbol on a stock market chart platform, an investor can analyze price action over a given time frame.

There are three main types of chart patterns used by analysts: traditional patterns, candlestick patterns, and harmonic patterns. Each "pattern" is a possible portrayal of stock movements based on historical performance.

An example: V shape pattern
For example, a stock split may drop the stock price, but historically, the stock rises again, creating a V shape on the stock chart. This V pattern is then available for analysts to consider when their investment undergoes a stock split. Designs like these come in many shapes and forms.

To learn more about each chart pattern and how to recognize it, check out this link.

Below is an image of a pattern called a “double bottom”. This pattern typically indicates a fluctuation in which a stock performs a price drop twice in a short period and then loses significant value shortly after. This pattern is said to resemble the letter W.

Volatility

The term volatility describes the propensity in which a stock increases or decreases. If a stock fluctuates often and hardly maintains a steady value, it should be noted that stock is highly volatile.

However, when reading stock charts, it is possible to delve deeper into the importance of volatility on investment decision-making. For instance, trending patterns with an immense amount of intraday volatility may indicate a period of destabilization within a company. Perhaps the company is trying out a new product or has recently rebranded, and that is why their stock chart displays high amounts of volatility.

In essence, it is typically much easier to acknowledge volatility on a stock chart but more difficult to ascertain why the volatility exists. However, noting an increase or decrease in volatility on a stock chart can be an essential first step in deducing why the charting is performing abnormally. 

Future Price

Future price targets can be an investor's best friend. If an individual could perfect their ability to predict future fluctuations in stock price, it would be easy to make a fortune in the stock market. Imagine you had a crystal ball that told you how a stock's chart would move ahead of time. You would make stock trading decisions based on when to buy at the lowest price and sell at the highest price. 

This is essentially what analysts attempt to achieve by analyzing future price metrics, though nobody can create a full-proof predictive machine. Brokerages have studied advanced algorithms and chart patterns worldwide to develop the most effective predictive stock charts regarding future prices. However, there may be a straightforward way to determine the future price that disregards the necessity for fancy tools. This can be done by using a moving average line. 

If an investor takes the closing price of a given stock from every day over the last 200 days, they will calculate the 200-day moving average price of that stock. If the price of a stock rises above that moving average, it is considered a buy signal. If the value of one share drops below that average, it is viewed as a sell signal.

Typically, moving above or below the moving average of the past 200 days indicates a significant move coming ahead. Therefore, analysts can apply this phenomenon and essentially predict what the price of a stock will look like simply by analyzing the moving average on its stock chart.

Short-term investors may choose to study 10-day, 20-day, or even 50-day moving averages instead since they alienate long-term averages that may not apply to their investing. 

Several analysts work cohesively to create accurate predictions for a stock’s future price. Below is an image that details the potential growth of Facebook’s stock. Again, these are predictions derived by analysts. As you can see, these analysts were quite bullish on Facebook stock as of July 2021. 

Past Performance

One way to analyze how a company is primed to perform is to examine how they've been performing over time. Mutual funds, ETFs, and index funds essentially promote themselves using past performance. Since the market has gradually increased in value since the stock market came into existence, it can be said that investing in a market index that tracks the performance of the overall market is an excellent long-term investment.

Many brokerages corroborate this since the market has always recovered from unfavorable fluctuations in the past. Similarly, stock charts can depict when breakouts have occurred and what caused them to do so. 

Some of the best stocks draw in bullish investors because their charts show clear performance indications and are relatively easy to predict. Some stock charts do not show apparent patterns in past performance and can deter investors since they will be inherently harder to expect as a result. 

When analyzing Facebook’s stock performance (pictured below) over the past five years, it is clear that the asset has displayed considerable growth. This information may be useful to long-term investors looking to invest in Facebook as they know they can analyze past performance to determine that long-term growth may be likely. 

Relative Strength

Relative strength is a measurement of a stock performance compared to the market as a whole or some other benchmark. For example, it is possible to measure the relative strength of an ETF compared to the market itself. 

It could also be possible to compare a company to its industry as a whole, which can effectively alienate solid investments from emerging industries. In other words, it may be wise to determine the relative strength of a new electric vehicle manufacturer by comparing their stock's performance to other competitors in that industry. If the stock is doing well but is not relatively strong compared to other players in that industry, it may be wise to invest in a competitor instead.

Below is Facebook’s RSI over a 5-day period. The purple line at the bottom of the image demonstrates the stock’s performance when compared to the entire market. Even the large drop in stock price does not change the RSI, which can be interpreted to mean that the whole market performed poorly at that time and therefore Facebook’s struggles were not an outlier.

Key Takeaways

  1. Accurately reading stock charts is a skill that may need to be developed over time as there are a lot of metrics to understand and apply.
  2. Stock charts are available on most online trading platforms and frequently look quite similar. Most online brokerages have research sections in which a variety of metrics can be added to a stock chart for further analysis. 
  3. High-level financial analysts may use stock charts to make informed investment decisions. It is uncommon for one single metric to be enough to make investment decisions, since they are often more potent when used in conjunction with other metrics.
  4. Metrics can be visually depicted in many ways, though the most common forms are bar, candlestick, and line charts.

The information provided herein is for general informational purposes only and is not intended to provide tax, legal, or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security by Candor, its employees and affiliates, or any third-party. Any expressions of opinion or assumptions are for illustrative purposes only and are subject to change without notice. Past performance is not a guarantee of future results and the opinions presented herein should not be viewed as an indicator of future performance. Investing in securities involves risk. Loss of principal is possible.

Third-party data has been obtained from sources we believe to be reliable; however, its accuracy, completeness, or reliability cannot be guaranteed. Candor does not receive compensation to promote or discuss any particular Company; however, Candor, its employees and affiliates, and/or its clients may hold positions in securities of the Companies discussed.