- Stocks are a vehicle for wealth creation, and knowing how to read them can be an effective way to increase your wealth.
- There are both risks and rewards when it comes to investing in single stocks.
- Mutual funds and ETFs are convenient, low-cost ways to participate in the stock market while diversifying risk.
Perhaps you’ve heard that investing in the stock market is a great way to grow your wealth. Maybe you’re interested in learning more about the stock market because you have stock through your employer. Or, perhaps you want to learn more about specific stocks in your mutual fund.
There are countless reasons why you might want to learn how to read stock prices in the stock market. The good news? You don’t have to be a stock broker on Wall Street to become well-versed in reading stocks. Below, you’ll find a detailed guide for reading stock prices.
The Stock Market as a Vehicle for Wealth Creation
Investing in the stock market can be a great way to grow your wealth. When it comes to the different types of investments out there, stocks tend to be on the riskier side, but in turn they can often come with higher rewards.
Knowing how to read stock prices is a practical step towards becoming a discerning investor.
When you think about investing in the stock market, you’re likely thinking about investing in common stock. A common stock is a stock that represents an ownership share in a company.
Investors purchase common stock because, in concept, there is unlimited upside to doing so: If a company grows profitably over the years, so will your investment. The downside to investing in common stock is limited — if a company’s value plummets, you only risk losing your initial investment (although no one wants that).
Another type of stock is a preferred stock, which is less risky than common stock (and pays higher dividends than common stock). Preferred stock is ideal for investors who are looking for a steadier source of income.
Many investors want to learn about common stock, perhaps because they are curious about their employer or have heard about a fast-growing company and eager to invest.
Investing in the stock market allows you to easily own shares of established brands like Coca-Cola, emerging technology “disruptors” like Uber, and thousands of large and small international and domestic companies.
How to Read the Daily Stock Chart
Let’s say you’ve invested in the stock market, and now, you’re interested in learning about how your stock is performing. It’s easy to get the hang of the daily stock chart once you understand the various symbols and what each term means.
First, go to either Google Finance or Yahoo! Finance. Once there, look at the set of letters after the stock’s name to find your stock’s symbol, also known as the “ticker symbol,” e.g. “AAPL” for Apple stock or “SNAP” for Snap Inc., the company behind Snapchat. Next, look at the bolded numbers that show the current price of your stock.
You’ll likely see a chart below the stock name that shows the price movement of the stock. On the chart is a trend line, which shows how the stock has performed over time. It connects the high and low prices in the stock’s history and, like any chart, upward growth means the stock is increasing in value, while downward movement means it’s decreasing in value.
Once you have the above information, you’re ready to keep learning. Below, we’ve covered the basic concepts you need to understand when reading the daily stock chart. Most of this information will be found under the “Key Stock Data” section of the stock’s profile.
There are a handful of investor expectations when it comes to a stock’s price. You’ll want to take into consideration a company’s current and future performance; its business fundamentals compared to competitors; and the effects of economic, political, global, and cultural shifts on the company.
In addition, you should know that investor behavior contributes to a stock price in that “hot” stocks are driven by a buying frenzy while some investors will “dump” stocks that seem to be rapidly dropping in price.
When trying to figure out what the price of a stock means, you’ll need to know the definition of the following terms:
- Closing Price — This is the end-of-the-day stock price as settled on by stock market buyers and sellers. Essentially, the closing price is the last price of the day.
- Share Price — This is the price of a single share of stock.
- Today’s High/Low — This is the high and low price-per-share fluctuation over the course of the day.
- 52 Week High/Low — These are the highest and lowest prices the stock has traded for over the past 52 weeks.
While these prices are good reference points, none of them is necessarily what you would get if you were to put an order to buy (or sell) the stock at that moment. While the website you are looking at might have a published price that is subject to delay, stock prices are more dynamic. Stocks are bought and sold throughout the day (and even after hours), and your order to buy the stock will be executed at the price sellers are willing to sell the stock in that moment, called the “market price.”
A price-to-earnings ratio, or P/E ratio, is the ratio of a stock’s current price to the last reported earnings. A P/E ratio is a measure of investors’ expectations for the company’s potential — the higher the P/E ratio, the higher the price investors seem to willingly pay for a company relative to its current earnings.
When researching a stock, it could be worthwhile to compare a company’s price-to-earnings ratio with its competitors or other companies in a similar space. A similar company with a lower P/E ratio could signal that its stock is a better value to purchase because of a lower price relative to its earnings, while a company with a higher P/E ratio could mean the opposite.
Knowing a stock’s dividend is important because it adds to the return on your investment.
If a company pays in dividends, the dividend yield is the dividend divided by the price. Let’s say you bought a stock at today’s price. You should compare the annual dividend you’ll receive with the price you paid.
(Although it’s not mentioned in a stock report, the other type of return in the stock market is a capital gain, which is the price you sell minus how much you paid for the stock without transaction costs.)
A beta coefficient is a measure of the volatility of an individual stock compared to the risk of the entire market. A beta of 1.0 means that the stock will move in the same direction as the stock market, meaning the stock’s value is sensitive to the risks in the market. The higher the beta above 1.0, the more the company’s valuation will fluctuate compared to that of the market.
For example, a beta of 2.0 means the stock has historically been twice as volatile as the market. A beta of less than 1.0 means the stock’s value will move less than the entire market. Beta is useful when comparing stocks to see which ones might be within the range of volatility that you are willing to accept.
Watching the price trend of a stock during the day won’t offer the everyday investor much insight. It’s important to not worry much about short-term changes when reading stocks. Long-term charts (i.e. one year or more) may be more valuable in terms of assessing how a stock’s price has changed and any positive or negative trend in its value.
Remember to exercise caution when it comes to reading any stock charts. After all, past performance cannot predict future activity.
How to Find Out if You Own a Stock in Your Mutual Fund
A mutual fund is a type of investment fund that owns a group of stocks. Typically, mutual funds won’t have a single stock take up more than 5% of the mutual fund.
Let’s say something major happens to a stock like Apple, and you want to figure out if Apple is part of your mutual fund.
The first way to figure out if you own a specific stock in your mutual fund is to research the stock and see the top institutional investors that own the stock, i.e. Fidelity, Vanguard, etc. Next, you’ll want to research the funds on that mutual fund provider’s website.
If you already own shares in a mutual fund, the other method would be to look into the “Holdings” section of that fund to see if the stock is present.
The Risks and Rewards of Investing in Single Stocks
There are both risks and rewards when it comes to investing in single stocks. If you’re adept at choosing stocks, you could reap many rewards. For example, when Apple launched the first iPod in 2001, its stock was just $10 a share. If an investor had purchased Apple back then and stuck with it until today, his or her return gained would now be 12,400%.
However, it can be risky to invest in single stocks, even if you’re an experienced, well-educated investor. The best thing you can do is invest in what you know and within your risk tolerance, or see below for other options. Try to invest in stocks with companies that are in your area of expertise, and research companies thoroughly to know their respective risks and prospects. As you can imagine, you’d be investing more than just money but also your time if you go this route.
Looking for Diversification? Consider Index ETFs and Mutual Funds
Many people are wary of investing in single stocks. It can be risky, and most laypeople are not savvy enough in the stock market to do it. In fact, one study found that the average investor underperformed the S&P 500 stock exchange by 6% each year.
If you’re looking for diversification, meaning you want to participate in a broad array of stocks from different companies, consider investing in mutual funds or Exchange Traded Funds (ETFs).
A mutual fund is an investment fund in which an investment manager pools funds from shareholders and then invests that money in a portfolio or a collection of many different companies. The fund can include just stocks, and many funds can also contain other types of investments.
Stock mutual funds can contain a basket of investments that mimic an index, like the S&P 500 (the 500 largest U.S. companies based on valuation) or the Russell 2000 (a collection of 2,000 small companies). Funds like these don’t vary their mix of investments that much because they track an index, and can be considered “passively managed.”
Other funds can have a specific investing style like “domestic growth” for U.S. companies, or have a geographic focus such as companies in the Asia Pacific region. These funds with an investment style experience more buying and selling by the fund manager, and are considered “actively managed.” There are thousands of funds with different styles to meet different investors’ criteria.
Unlike stocks or ETFs, mutual funds trade on their NAV or “Net Asset Value” that is determined only once per day and after the close of the trading.
ETF (Exchange-Traded Funds)
A collection of stocks in a single fund, an ETF works similarly to a mutual fund, and can track an index or follow a specific manager’s investing style. The biggest difference, however, is that ETFs can be bought and sold throughout the trading day, and that causes ETF prices to fluctuate during the day. That could be important in a fast-moving trading day. However, ETFs can be less expensive to own with management fees that are typically lower than for mutual funds.
Slow and Steady Wins the Race
Investing in the stock market can be an essential way to grow your wealth. Although it’s important to understand how to read stocks, it’s just as important to understand the risks and rewards of investing in the stock market in relation to your personal goals. This can help you gain the confidence you desire so you can decide if you want to invest more actively.
If you’re looking to be more hands off while spreading your investment across many stocks, consider mutual funds and ETFs, which provide convenient, low-cost diversification through passively or actively managed funds.
If you’re new to investing in the stock market, you’ll soon realize that the more you continue to learn, the more confident you’ll become.