How to Read a Stock Chart

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Paper assets is one of the three major asset categories the Wealth Academy recommends for wealth building. When it comes to investing in stocks, the Wealth Academy recommends investing for the long term. But whether you have a 3-year investment timeframe or a 30-year timeframe, it’s important to understand the investment process and terminology as you make your investment decisions. Below are some basic terms for stock investing and a glimpse at some more advanced techniques for active stock investors.

Basic Terms

  • Open: Open refers to the first price at which a stock trades during regular market hours.
  • Close: Close refers to the closing price of the previous trading day.
  • High/Low: High and Low are the highest and lowest prices the stock reaches during market hours.
  • 52 Week High & Low: 52 week high and low represent the highest and lowest prices the stock has traded for during the preceding 52 weeks.
  • Volume: Volume is the amount of an asset or security that changes hands over some period of time, often over the course of a trading day.
  • Market Cap: Market capitalization is the size of a company based on the number of its shares on the stock market multiplied by its current share price.
  • PE Ratio: PE ratio stands for price-to-earnings ratio. It is a way to value a company by comparing the price of a stock to its earnings.
  • Dividend Yield: Dividend yield shows how much an investor may receive annually in dividends, expressed as a percentage of the current share price.
  • Bid/Ask: The bid is the highest price an investor is willing to pay for a stock. The ask is the lowest price an investor will accept to sell a stock.
  • Beta: Beta shows how volatile a stock’s price is compared with the stock market, which may be an indicator of how risky the stock is. If beta is greater than one, the stock has historically been more volatile than the stock market for the specified period.
  • EPS (TTM): EPS (TTM) stands for earnings per share for the last 12 months (“trailing twelve months”).

 

Advanced: Technical Indicators

A technical indicator is a mathematical pattern derived from historical data. Investors use it to predict future price trends and make trading decisions. It uses a mathematical formula to derive a series of data points from past price, volume, and open interest data.

  • Relative Strength Index (RSI): The RSI is a momentum indicator that measures the speed and change of price movements. The RSI can have a reading from 0 to 100. Generally, a value of 70+ suggests a stock is overbought/overvalued and might pull back in price. Similarly, an RSI value of 30- suggests a stock is oversold/undervalued.
  • Money Flow Index (MFI): The MFI is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset. Investors can also use it to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100. Unlike conventional oscillators such as the RSI, the MFI incorporates both price and volume data, as opposed to just price.
  • Moving Average Convergence Divergence (MACD): MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. MACD helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
  • Bollinger Band: Bollinger Bands are a technical analysis tool for generating oversold or overbought signals. There are three lines that compose Bollinger Bands: A simple moving average (middle band) and an upper and lower band. Watch the video explanation of how these bands work.

 

Sources: NerdwalletCorporate Finance Institute 1 2Investopedia 1 2 3 4

 

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