Have you ever wanted to know how to follow the stock market, or how to follow individual stocks – or just how to make sense of it all? If so, you’re like countless other investors and aspiring investors in that you want to have a systematic way to follow the market, track stocks, pick up on possible trends, figure out how news impacts trading, and plan the fundamentals of a profitable trading strategy.
Here, I will give you the basics of tracking the market and following the market as a whole, as well as certain stocks, so you can better equip yourself for trading success.
How to Follow the Market: Using Indices
One of the best ways to track the overall performance of the market is to track market indices. A market index is a way to measure how a stock market is performing by using a representative sample of the stocks in the market. You can have a market index that is for one particular exchange, as with the NASDAQ Composite Index, or for a larger market, as with the Dow Jones Industrial Average (as stocks in this average trade on both NASDAQ and NYSE).
Market indices give you an at-a-glance look at the relative, overall health of the market. If the Dow Jones, for example, goes up for an extended period of time, like it did between 2003 and 2007, one can reasonably assume that the economy as a whole is similarly performing well. You can also gauge global performance by using a global market index, such as the S&P Global 100 or MSCI World.
Virtually every major stock exchange in the world has its own index. The London Stock Exchange, for example, has the FTSE 100, which tracks the 100 largest stocks on the LSE based on market capitalization.
Market indices are useful for several reasons. For starters, they give you an idea of the overall health of the market. Plus, they can help you pinpoint bull and bear trends in the market, i.e. if, overall, stocks can be expected to go up or down based on future expectations. Additionally, you can even trade indices using index ETFs that are tied to the performance of a specific index.
Indices can also give you more specific views of a particular sector. For example, the Dow Jones Internet Composite Index (DJINET) tracks 40 stocks (15 from the internet commerce sector and 25 from the internet services sector) that generate the bulk of revenue from the internet. Companies in this index include EarthLink, Google, Netflix, TD Ameritrade, and Yahoo!, among others.
Following Individual Stocks
Following an individual stock means knowing what to look for and how to track its performance over time so you can judge when to enter the market and make a trade.
The main tool for following a stock is a stock chart, or a graphical representation of the stock’s price over a period of time. There are several types of charts – line charts, bar charts, candlestick charts, etc. – but they all show you the basic information you need, such as:
- Current price
- Volume (how many shares are being traded at a given point in time)
- Average volume (how many shares are usually traded, on average)
- Percentage change in price (either positive or negative)
Additionally, you can see a few key metrics that you can use to determine the stock’s relative value – which is useful to determine if you should buy, sell, or wait. These include the price-to-earnings ratio; 52-week range (the high and low price over the past year); the daily range (high and low price over the current trading day); earnings per share (EPS); and the beta.
The beta of a stock is how risky it is compared to the market or a benchmark. A positive beta means that the stock generally performs as the market performs. For example, when the index is moving above average, the stock will more than likely move above average. A negative beta suggests the opposite. The higher the beta, the more of a difference there will be between the index and the stock’s return.
Google (GOOG), for example, may have a beta of 1.08. The market itself has a beta of 1. So, when the market is up, Google is generally up – but not by much more than the market. Citigroup (C) could have a beta of 2.8, which means its price will rise much higher than Google, relatively speaking, if the market performs well. The higher the beta, the riskier the investment because while you can get higher returns relative to the market, you can also lose more.
Tips on Tracking Stocks on a Daily Basis
One of the best ways to follow a stock or a group of stocks is to have alerts sent to you on a regular basis. You can have alerts sent by text message or by email, and these alerts can tell you anything from when a stock reaches a certain price to when a certain volume threshold has been reached (or when the stock’s 15-day moving average crosses over the 50-day moving average, a common indicator that the stock’s price will probably rise).
Take advantage of automatic portfolio tracking through your brokerage. Also, look for common correlations. When the U.S. dollar is down, for example, oil prices generally go up and so does the value of oil company stock. Additionally, observe large movements in volume and price. If you see a large price movement accompanied by large volume, that is generally a sign of an uptrend in the market. If you see a large price movement without volume increases, though, that could be a false signal.
Use market indices, beta, other stock metrics, and price and volume to track stocks and keep up to speed on how they are performing, and you will be much better at following stocks and the market in a profitable way.