Remember the first time you got behind the wheel of a car?
Chances are the experience was as intimidating as it was exciting. You had all those knobs, pedals, and dials to figure out… not to mention keeping tabs on what the other cars around you were doing.
Of course, fast forward just a week or two, and you were probably scooting around town like a pro—or at least without being in acute danger of a collision.
Well, reading stock charts is pretty similar. It may seem totally baffling at first… but once you know what to look for, it may not be as confusing as you thought, and it can help you make much better decisions as a new investor.
How Investing Can Help You Reach Your Financial Goals
Before we dive into the nitty-gritty of reading stock charts, let’s take a step back. Why is investing often considered such an important financial move in the first place?
Well, for one thing, it can be a way to make money—otherwise known as a passive income stream. When you buy and hold market assets that perform well, you’re earning money without putting in extra hours at work, which can unlock a whole new level of income-generating potential.
But perhaps more importantly, investing is a great way to ensure your stash of cash keeps up with the cost of living. Even a large nest egg will lose value over time due to inflation, especially if you’re keeping it under your mattress—or even in a low-interest savings account.
When considering the various savings and investment options available, you’ll find that smart stock investing has some of the best potential ROI, or return on investment—and thanks to the power of compound interest, the capital gains you could earn might eclipse inflation.
Parts of a Stock Chart, Broken Down
If you’ve decided investing is right for you, you’re probably ready to learn what, exactly, all those stock chart lines and letters mean. Since this post is directed at beginners, we won’t get too technical on you, but here are the basics when you’re first learning how to read stock charts.
Stock Symbol and Exchange
The first thing you’ll need to get familiar with when you’re looking at a stock chart is the stock symbol. This is the series of letters, and sometimes numbers, by which a particular stock is uniquely identified, and is also known as a “ticker.” For example, the stock symbol for Apple is AAPL, and the stock symbol for Amazon is AMZN.
Stock symbols are defined by the exchanges on which those stocks are traded—for instance, the New York Stock Exchange (NYSE) or the Nasdaq. These are the markets on which stocks and other assets are bought and sold. Stocks traded on the NYSE and Nasdaq can have tickers up to 5-letters long, but most are only 2-4.
The ticker symbol identifies which stock’s chart you’re looking at, and you may need to know it beforehand in order to look up the stock chart in the first place. You can usually find the ticker pretty simply by running a quick online search, and you can then use a website like StockCharts.com or Trading View to pull up the chart itself.
The first thing you’ll notice when looking at the chart itself is that it’s pretty much a line graph. Remember middle school math? You’re dealing with a basic X and Y axis—and the X axis refers to time.
The trend line is measuring the asset’s performance over that period of time, which we’ll dive deeper into in just a minute, but for now, let’s focus in on how much time we’re talking about.
You might want to view the stock’s performance over a single day, week, or month, or see its long-run trend line over the past year or longer. It all depends on your personal trading goals.
To adjust the chart period, find the portion of the stock chart with different listed lengths of time, such as one day, five day, six months, YTD (“year to date”), or even the stock’s full history.
Clicking each will result in a different trend line corresponding to the stock’s behavior over that period of time, and may even offer live, up-to-the-minute updates if the exchange is currently open.
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Now, let’s hone in on that actual trend line you’re looking at. It corresponds to the trade price of the stock in question, which changes over time.
Some stock charts may spell out the stock’s opening price, low price, high price, and closing price during a given time period, usually marked simply O, L, H, and C. Here’s what those figures each refer to:
• The opening price is the first price at which the stock traded during the given time period.
• The low price is the lowest price at which the stock sold during the given time period.
• The high price is—you guessed it—the highest price at which that stock sold during the given time period.
• Finally, the closing price is the last price at which the stock sold before the exchanged closed.
If the exchange is still open and the stock is being actively traded, the stock chart will likely display the last price, which is just what it sounds like: the last price at which the stock was successfully sold.
You might also see the change in that price from the one immediately before it, or last change, usually displayed as both a dollar value and a percentage.
For example, if you were looking at a chart for Apple stock, it might display the following string of letters and numbers:
AAPL 197.16 +0.05 (+0.04%)
In this example, AAPL is the ticker symbol, and $197.16 is the last recorded price of a single share sold on the exchange. That price was five cents higher than the trade immediately before it, meaning the value of the stock raised, in that time, by 0.04%.
By looking at how the trend line moves over the chart period, you can get a sense of the stock’s price and performance over time as well as its most recent statistics.
Alright. At this point, you’ve got price over time, which is a huge key component to understanding how a stock is behaving on the market.
But there’s one more uber-important factor to take into consideration: volume.
Volume corresponds to how many shares are bought and sold within a specific time period. In other words, it’s a measure of supply and demand.
Volume is often represented as a series of bars running along the bottom axis of the chart. The bars’ size aligns with the number of trades made during that time period, and can be useful for guesstimating upcoming sales trends for that asset.
It’s not a perfect science, of course, but if a stock is trading at low volume—i.e., few shares are being bought and sold each day—it may indicate that the current price trend is about to change. Perhaps the stock is in poor demand because it’s valued too highly for the market. It could also just mean the investment is out of favor with investors.
On the other hand, a high trade volume might indicate that you’ll have an easier time selling the stock quickly if you’re considering short-term trading.
Guess what? You’ve already got the basics of reading stock charts down! Understanding that you’re watching the way an asset is traded over time is the most important part of learning how to read stock charts.
Of course, these charts are used by both veteran and amateur investors, which means that lots of techy traders have come up with all sorts of digital tools to glean ever more nuanced information—some of which may honestly be more confusing than helpful to a beginner.
But some of it can be informative. For instance, your stock chart may indicate when dividends (portions of profit) were paid to shareholders, or when stock splits occur. (In a stock split, a company decides to divide existing shares into more shares, or split them, which can encourage traders if the price of a single stock has grown very high.)
You may also be able to manipulate how the price trend information is displayed, perhaps by overlaying a general market trend line for comparative purposes or using a “candlestick display,” which segments off each trading day into a candlestick-shaped bar, which indicates the high and low price at a glance.
Some stock chart platforms also include auxiliary information, such as financial ratios and the company’s latest income statements, which can help you get a better sense of the big picture.
Okay… So What Does it All Mean?
Don’t get us wrong: There is a lot to take in when you’re looking at a stock chart. And as with all things investing, even if you knew what every single line and letter meant, a lot of investing is guesswork. There’s always some risk involved—and there’s no such thing as a totally safe investment!
But the basic information you can glean from a stock chart is actually pretty simple: how has this asset performed over time? That information can help you extrapolate—or at least make a cautious, well-informed guess—as to how it might continue to perform in the future.
Of course, reading stock charts is just one small part of evaluating potential investments. Other things you may want to consider could include looking into the company’s values and policies, taking a gander at the financial ratios, and taking advantage of the wealth of online tips and tools available to traders—all while keeping a critical eye and remembering that every investment is a risk.
It’s also important to keep in mind that even the “safest” investment will be vulnerable to market fluctuations, with some assets being riskier than others. Only you can ultimately decide how much risk you’ll tolerate in your portfolio.
If Reading Stock Charts Gives You a Headache, You Still Have Options
If reading stock charts makes you want to pull your eyeballs out… honestly, we get it. It’s a lot of information, and if you’re not a career day trader, chances are you have other things to spend your time and mental energy on.
Fortunately, you don’t have to give up on investing entirely if you don’t want to become a stock-chart whisperer. There are plenty of other options to explore that can help you build a diversified, targeted portfolio and get you closer to achieving the goals you’ve set for your financial future.
Automated investing, or “robo-investing,” as it’s sometimes called, has created a whole new avenue for folks who want to put their money to work without making it into a personal project.
Using a combination of human-powered research and high-powered computer algorithms, automated investment platforms can allocate, track, and rebalance your assets without stress or strain on your.
SoFi Invest® offers an automated investment product that can help you plan for your financial goals and create a diversified portfolio to help get you there. (Plus, there are no SoFi management fees at all. Just sayin’.)
No matter what kind of investment strategy you decide is right for you,and whether or not you pour your heart into learning the ins and outs of reading stock charts, keep in mind that the magic of compound interest is powered by time—which means it may be in your best interest to start early.
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