Maybe you watch the news. You hear about how the Dow Jones went up 30 points. What does that mean exactly? And maybe you see stock charts all the time. But you can’t make heads or tails of it. Let’s break down the basics of the stock market.
How to Read a Stock Chart:
If you are a complete beginner to investing, you probably don’t know how to read a stock chart. It looks complicated with lines going in different directions and bars going up and down. Don’t worry, stock charts can be easy to understand. Most investors/stock traders use websites like Google Finance and Yahoo! Finance to find basic information on stocks.
When first reading a stock chart, you want to determine the trendline of the particular stock chart you are viewing. In the stock chart below, the trendline is the darker blue line that the red arrow is pointing at.
For other charts, the trendline may look different, but the general idea is still the same: to show trends in how a particular stock is behaving. Here is another example of a trendline that you might see. The yellow line is not shown as part of the actual stock chart. This chart is also very common because the red and green bars show investors selling and buying the stock.
Types of Trendlines:
Trendlines are also known as bounding lines. They connect two or more price points on a stock chart. Trendlines can help determine high and low trends to predict how the stock price will act in the future. There are generally two types of trendlines: support and resistance.
Support trendlines connect price lows. When stock prices are close to the support trendline, investors expect that it might bounce off higher from that point. If the bounce does not happen but breaks or drops below the trendline, it can mean that the price might drop even more.
Resistance trend lines connect price highs. When stock prices are going towards the resistance trendline, investors might judge it too expensive to buy. But, if the resistance trendline is broken when stock prices rise with a heavy volume, the price’s strength is high and investors will consider buying if demand can be supported at such a high level it will not drop below when the current trend is still ongoing.
Trendlines are definitely useful when understanding a stock chart. But there is also other information that needs to be focused on. Be mindful of stock splits and when dividends are issued. Stock splits occur when a company decides to split each share into more shares. They often shift the stock price as the more shares they are, more investors will buy driving up the price once again. Another thing is to look at historical volumes. High volume generally occurs when there is major news about the issuing company. It allows more flexibility in buying and selling as there are more people trading.
20 Basic Stock Market Terms:
Stock market -- A place where parties like individuals and institutions can sell and buy stocks
Stock exchange --A place where securities like stocks and other financial instruments can be traded (or exchanged)
Stock trading -- Act of selling and buying stocks
Ticker/Stock symbol - An abbreviation that is used to identify a particular stock market’s particular stock’s publicly traded shares
Annual report -- A report containing a lot of information such as management strategy and cash flow prepared by a company to make a good impression on its stockholders
Accumulation/Distribution -- An indicator using price and volume to determine a stock’s trend of being bought (accumulated) or sold (distributed); find more info here
After-Hours Trading -- Trading stocks after market hours, usually between 4:00 and 8:00 PM
Arbitrage -- Buy and Sell the same security on different markets and price points to gain profit through the price gap
Ask -- Asking price, or the price a seller will accept
Bear market -- Downtrend with falling stock prices for a period of time, opposite of a bull markets
Bid -- Buying price, or the price a buyer is willing to pay
Blue chip stocks -- A company’s stocks that are regarded highly in reliability, quality, and ability to operate in good and bad times profitably
Bull market -- Uptrend with increasing stock prices for a period time, opposite of a bear market
Close -- The time when stock trading closes on a stock exchange
Dividends -- Portion of a company’s profit paid to shareholders, can be paid on a quarterly or annual basis
Earnings per share -- A company’s profit divided by its common stock’s outstanding shares
Initial Public Offering (IPO) -- When a private company becomes public by selling their stock to the general public for the very first time
Leverage -- Use debt to increase return from a project or investment
Margin -- The difference between an investor’s account’s total securities and money borrowed from a brokerage to buy an investment
Spread -- Difference between two yields, prices, or rates
You can also find more financial terms here.
Written by Allie Chang