It’s hard to be a success at the stock market and not know how to read stocks. It doesn’t matter if you are a fundamental investor or a technical investor; if you have anything to do with stocks, it is highly recommended that you learn how to take in various forms of data and intelligence about stocks and interpret what they mean for you and your portfolio.
Reading stocks doesn’t have to be complicated, either. Contrary to popular belief, you do not have to be an expert with indicators like Bollinger bands, MACD, or any other advanced metric. You simply have to know how to make sense of the information that is given to you and know what it means.
Here, I’ll give you an overview of how you can read stocks – especially how to make sense of the standard info you receive from a stock quote throughout the day.
The Anatomy of a Basic Stock Quote
If you turn on CNBC, or go to Google Finance, or use your trading platform, you’ll see a ticker scrolling by with the abbreviations of companies and numbers in various colors. These are abbreviated statements of the stock’s current price, and give you the first clue as to what the stock is doing in the market at that moment.
Let’s take a closer look at a quote.
The above quote is for Apple (AAPL), taken from Google Finance. Your screen will look different if you use something other than Google Finance, but all the basic information is the same.
The first thing to know is the spot price, which in this picture is 604.30. This is the value of the stock at this moment in time. It is expressed in “points”, so it would be 604 points, instead of 604 dollars. Below that is how many points the stock has risen or fallen. The number in parentheses is the percentage of the overall value that the stock has risen or fallen. When seeing how much the stock has risen or fallen, ignore the points number and look at the percentage; it provides you with a better perspective.
The range is the price range over the current trading day. Below it is the range over the last 52 weeks. Below that number, you see something called the open. This number goes with a group of other numbers called the OHLC – open, high, low, and close:
- Open: The price at the beginning of the trading day
- High: The highest price the stock reached during the day
- Low: The lowest price reached during the day
- Close: The final price
Note that the close for one day and open for another day are not necessarily the same. Stocks can be traded after hours.
We’ll stop here and address a crucial element of any quote: volume. Volume is the number of shares that have been traded – bought or sold – throughout the day. You can glean a lot of useful information from analyzing volume.
For starters, a stock with low volume is thinly traded, which means it lacks liquidity. That means it can be hard to buy or sell. Likewise, a stock with higher-than-average trading means that the stock is very liquid, but can also be very volatile (meaning the price goes up or down relatively quickly and dramatically).
On its own, volume isn’t terribly useful. When coupled with price on a chart, though, it can be more useful. For example, churning is when higher-than-average volume is accompanied by a stock trading in a narrow price range. This means a lot of shares are changing hands, but the price isn’t corresponding appropriately.
Usually, this is the inverse of what typically happens, which is this saying: “Volume precedes price”. Spikes in volume represent higher interest in a stock, which usually precedes some change in price.
The other data on the chart reveal very important metrics that are connected to the stock’s price.
The first is market capitalization. All you need to know about this is that the market cap represents the number of outstanding shares multiplied by the stock’s price. This gives you an indication of the rough “size” of a company.
The next one is a big one – the price-to-earnings (P/E) ratio. A P/E ratio is the stock’s price per share divided by the stock’s annual earnings per share (EPS).
A P/E ratio gives you some idea of how the market values a company’s stock. All other things considered equal, a stock with a higher P/E ratio than another, almost-identical stock with a lower P/E ratio will be considered a better investment. It’s important to compare a stock’s P/E ratio with the average P/E ratio for the industry in which it is in. If a stock’s P/E ratio is higher, it could be a growth stock – but if it is too high, it is very possible that the stock could be overvalued.
Similarly, a low P/E ratio is one indicator of a value stock, a sign that the company could be undervalued (when used with other indicators).
The next number is the dividend/yield. The dividend is the dollar amount per share that is distributed to stockholders on a quarterly to annual basis. The yield is the percentage of the entire annual dividend divided by the current share price. If the company delivered a total of $1 per share in dividends last year, and the stock’s current price is 10, then the yield will be 10%. (Most yields are much lower.) Most investors who aren’t interested in dividends or income stocks largely ignore this number.
The next number – EPS (earnings per share) – is a big one. This is calculated by taking the company’s net income for a quarter, subtracting any dividends paid on preferred stock, and dividing this number by the number of average outstanding shares over that period. For example, if the company brought in $30 million in income, paid out $5 million in preferred dividends, and had an average of 5 million shares outstanding, the EPS would be 5.
All other things being equal, a higher EPS is preferable to a lower one. This means that each share of stock is more productive in producing profit for the company.
EPS can be easily manipulated. But, it also is a driving force behind the market’s perspective of a stock. If a company routinely misses EPS estimates, its stock will suffer. If it hits or beats EPS estimates, the stock’s value will probably rise.
Beta and Institutional Ownership
The last two figures on the chart are ignored by some investors, but are taken into consideration by virtually every strong investor in the market.
Beta is a statistical value that indicates how volatile a stock is in relation to the market. The market has a beta of 1.0. If a stock’s beta is higher, then its price varies more than the market’s return. If a stock’s beta is lower, it varies less. In other words, AAPL’s beta is 1.21, which means its price will be 1.21 times more volatile than the market, on average. (If the market goes up by 1%, AAPL will go up by 1.21%).
If beta is negative, there is an inverse relationship. If the beta is -1.21, then AAPL will decrease by 1.21% for every 1% gain in the market.
The last figure is institutional ownership. This is the percentage of shares that are owned by institutions, which include financial organizations (like investment banks), endowments, pension funds, insurance companies, mutual funds, hedge funds, and other large, well-funded entities. There are two schools of thought about this. The first says that higher percentages of institutional ownership indicate “approval” of the stock from the market.
The second suggests that high percentages of institutional ownership leaves little room for individual investors to realize big gains, since, presumably, all the “big gains” would have already been earned.
By looking at all of these figures, you can become more adept at analyzing a stock and grasping the crucial bits of data and information about a stock so you can make a more informed choice. Good luck!