Reading Stock Charts: A Practical Guide for Investors
Stock charts are graphs that display the stock price and volume history of a company's stock. Advanced charts can include price trend lines, chart patterns, and indicators which investors may attempt to interpret as part of their investment decision making process.
Being able to read a stock chart can help investors understand how a stock has been performing, and possibly provide clues to the future path of its share price. The chart features themselves are factual and mathematical in nature. Any projections for stock prices into the future are subjective interpretations, regardless of whether these projections are constructed from fundamental analysis, advanced charting analysis, or a combination of them.
Basic Stock Chart Features
Basic line chart features for a stock include:
- Passage of Time (X-Axis)
- Price Level (Y-Axis)
- Historical Prices
- Volume Indicator
Learn about each below.
1. Passage of Time (X-Axis)
The horizontal axis (the x-axis) of a chart presents the passage of time, either in hours, days, weeks, months or years from left to right. The gridline and tick labels indicate specific time points.
Source: Seeking Alpha's Quote Page
The above 6-month chart presents an x-axis with labels for those 6 months. The placement of May 2021, outlined in red, would represent the beginning of the month of May
2. Price Level (Y-Axis)
The vertical axis (the y-axis) represents price levels. In some cases, the bottom of the y-axis will represent a price level of $0, but often that is not the case, with the lowest price level shown being a higher price point.
Source: Seeking Alpha's Quote Page
3. Historical Prices
Historical prices are plotted where the time scale and price intersect on a specific date. To create a basic line chart, the price points are connected to form a line from left to right.
Source: Seeking Alpha's Quote Page
4. Volume Indicator
Typically below the stock price graph, but alongside the same x-axis, is the volume chart. In the example chart below, the volume, or number of shares traded, is represented by the grey bars.
Source: Seeking Alpha's Quote Page
In the above chart, the highest volume day in recent years was towards the end of 2020.
Stock Chart Types
Once investors understand the terms found on most stock charts, they have an easier time reading the charts and interpreting the data, trend lines, and chart patterns. Investors can choose from several different chart types to gather the insights you need.
1. Line Charts
Source: Seeking Alpha's Advanced Chart from AAPL Quote page
A line chart is the most basic of all stock charts. It provides a graphical representation of a stock's closing price movement over time. Line charts can be viewed over different time frames, such as one day, one month, six months, or one, five, and ten years.
Investors using Seeking Alpha's Symbol pages for a particular stock can view the maximum timeline ((max)) to see a stock's history since inception. Short-term investors or traders can get more value from the one-day or 5-day charts, while long-term investors are usually more interested in multi-year charts.
2. Bar Charts
Source: Seeking Alpha's Advanced Chart from AAPL Quote page
Bar charts can provide investors with daily illustrations of four critical pieces of data, including the stock's:
- Opening price
- Closing price
- Its highest price of the day
- It's lowest price of the day
These data points are connected by a vertical line representing the high and low prices for a specified period. Horizontal lines to the left and right represent the open and closing prices. Bar charts are typically color-coded to show positive price movement (green or black) or negative movement (red).
Bar charts are used to analyze trends, track volatility, and identify possible price reversals.
3. Candlestick Chart
Source: Seeking Alpha's Advanced Chart from AAPL Quote page
The candlestick chart uses the same four pieces of data as the bar chart (opening price, closing price, and highest and lowest daily price) but presents it in a slightly more complex way. Common features include:
- "Shadow": You'll see a thin line known as the "shadow," which depicts the high-low price range.
- Green Box: There will be either transparent or green boxes to show periods when the closing stock price was higher than the closing price from the previous day, which is a bullish indication.
- Red of Pink Boxes: These periods when the stock price was lower than the previous day's closing price.
By tracking the open and close prices, you can determine if there is upward or downward momentum.
4. Point-and-Figure Charts
Source: Seeking Alpha's Advanced Chart from AAPL Quote page
A point-and-figure chart is used to plot a stock's price movements without regard for time or volume. Price movements are plotted in a vertical line using X's for price increases and O's for decreases.
While a point-and-figure chart can reveal trend signals and patterns, it doesn't provide any insight into timing, because it doesn't consider the passage of time. Investors use these charts to confirm signals found on other chart types.
5. Logarithmic Charts
Source: Seeking Alpha's Advanced Charting from Quote page
Logarithmic charting presents the price data on a different scale than a traditional linear chart. On a logarithmic chart, the price levels on the y-axis won't be spaced evenly.
While investors are usually accustomed to viewing linear stock charts, logarithmic charts may reveal greater price movement insights from a certain stock or security was trading at lower price levels.
Finding Support and Resistance
For many investors, charting is a way to predict a stock's price movement between support and resistance levels. The support level acts as a barrier that prevents a stock from declining below that. The resistance level is an upper price level which a stock has difficulty climbing through.
Stocks tend to move between their support and resistance until higher demand or supply disrupts the trend. For example, when more buyers enter a stock, volume goes up, reflecting more demand. Conversely, when more sellers begin to take profits, volume goes up, as does the supply of the stock, driving its price down. In either case, when the supply or demand exceeds the normal range, the stock can break out from its support or resistance level.
Investors use support and resistance levels to zero-in on specific points on a chart where there is a likelihood a stock will break out of a prevailing trend. Investors can identify support and resistance levels using trend lines and moving averages.
Stock Statistics
Several basic stock statistics often accompany charts, or appear on a nearby page. Some of these basic stock statistics are presented below.
1. Historical Data or 52-Week Range
The 52-week trading range presents a stock's highest and lowest prices over the past 12 months. It may be possible to also see long-range historical prices in a table format.
2. Day Range
The day range shows the lowest and highest prices at which the stock has traded during the current trading day, or the previous trading day if the market is closed. The day range of the high and low may not be the same as the stock's open and close prices, which are displayed separately.
3. EPS
A company's
earnings per share ((EPS)) presents the net profits earned per outstanding share for the previous 12 months (referred to as trailing 12 months). In some cases, as on Seeking Alpha, forward EPS is presented, which represent the projected EPS for the next year based on analyst estimates.4. P/E Ratio
The price-to-earnings (P/E) ratio is a widely used measure of a stock valuation, taking the current stock price and dividing it by the company's most recently reported EPS for the year. Investors use the P/E ratio to determine how many years it will take them to recoup their investment.
In cases where the forward EPS estimate is used, the forward P/E ratio is reported.
5. Dividend Rate & Dividend Yield
Dividends are a return of profits to shareholders, usually by way of cash dividends. Not all companies pay dividends, but those that do will state them in terms of the annual dividend payout per share. The dividend yield represents the company's dividend payout expressed as a percentage, taking the annual dividend and dividing it by the current stock price.
6. Ex-Dividend Date
The ex-dividend date represents the day when new shareholders will no longer be entitled to receiving a previously declared dividend. To receive the dividend, investors must purchase the stock prior to the ex-dividend date.
Stocks often decline by approximately the same amount as the dividend, once the ex-dividend rate arrives. For example, if a stock that traded at $100 and pays a $1 quarterly dividend goes ex-dividend, investors might only be inclined to buy the stock for $99 once the dividend is no longer eligible to be received.
7. Open, Close Price, Previous Close
The open price is a stock's first trade price of the day. The close price is a stock's last trade price of the day. The previous close price will be reported as the most recent valuation level when the markets are closed.
8. Market Cap
A market cap, or market capitalization, reflects a company's total dollar market value as calculated by multiplying the number of shares outstanding by the stock's price. Company market caps are often compared against the market caps of other firms in the same industry.
9. Bid and Ask
The bid price is the highest current offer price to buy a stock or other investment security, while the ask price is the lowest sell price currently offered in the market. The difference between the bid price and ask price is known as the "spread", or the bid-ask spread.
Generally, when trading activity is heavy for a particular stock, the spread is narrower. Conversely, when there is less trading activity, and often fewer market participants in a stock, the spread tends to be wider. Buying and selling shares on stocks with a wide bid-ask spread can result in less competitive execution prices.
10. Average Trading Volume
Volume reflects the total number of shares bought and sold for that day. Volume, especially when compared to prior periods, can be an indicator of investor interest in a stock.
A stock's trading volume is useful to monitor. It is usually reported per trading day. Financial websites will often report the average volume for a given stock, which is typically the average number of shares that have traded per day over the past 20 or 30 trading sessions.
When trading volume increases significantly over its average volume, it could indicate a sudden spike in investor interest to buy or sell the stock. Often, increases in trading volume occur before or after major company developments, such as an earnings release, or the announcement of a new product or major corporate development. Stock price movements are generally seen as more meaningful if they occur on heavy trading volume.
11. One-Year Price Target Estimate
A less common piece of data found on primary stock pages is the one-year price target estimate, which represents the average price target estimate of the professional analysts who have issued one. Sometimes this is referred to as the consensus price target. It is important to remember that price target forecasts are just estimates, and that analysts can sometimes make misguided forecasts.
12. Beta
Beta is a measure of a stock's volatility relative to the systematic risk of the stock market (as represented by the S&P 500 index or a total stock market index).
- If a stock's beta is greater than one, it has a history of greater volatility than the overall stock market, during a specified period.
- A beta that is less than one but greater than zero has been less volatile compared to the stock market.
Important: While past performance is not an indication of future performance, beta can be an indicator of how a stock may move relative to swings in the market.
Where to Find Stock Charts
Stock charts are available on all Seeking Alpha quote pages. Investors who click on the "Advanced Chart" button will access a page with advanced charting options, including logarithmic charts.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.