Understanding the stock market is complicated, and reading stock quotes is big part of that.
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Appreciating the value of stock quotes is the first step to making informed buy and sell decisions. So it’s really important to take the time to understand them. The following breaks down the basic makeup of a stock quote, and how to properly analyze them. We’ll follow along by using Google’s (GOOG) stock quote as an example.
The Basic Ingredients of the Stock Quote:
The Last price is pretty much what you’d expect. This is the last price at which the stock traded. This price only moves during market hours – Monday to Friday, 9:30am to 4pm EST.
Take the Last Price with a grain of salt. Don’t trade based solely on it, because there’s something known as “after-hours trading“, which could make the Last Price drastically wrong.
This is the total number of shares that changes hands in any given day. For example, if 100 shares of GOOG are bought over the course of one day, the volume will be 100. Let’s say you take those 100 shares and sell them to someone else. A higher volume is normally associated with a higher appeal for the stock. Take a look at GOOG above! Shares have changed hands 48,411 times!
Look at the Volume to see the stocks popularity each day. Spikes in volume usually means that stock prices are moving rapidly in one direction and is having a rather volatile day.
Open and Previous Close
This is the price that GOOG started trading at when the market opened this morning at 9:30 AM. If there’s a big gap between the Open and Previous Close, it suggests something happened overnight during after-hours trading. Do your research and you might be able to profit.
As we saw earlier, last price is only good for getting a sense of where the market price is. If you’re looking to actually sell the stock, you want to look at what’s called the bid price.
Think about trying to sell your house – the price that you advertise is usually not the price you’d sell it for. Most people list it higher for leverage. At the end of the day, the price that matters most is what you actually sold it for, not what you listed it at. Similarly, when you sell a stock, you would not look at the “advertised” value like the last price, but rather the actual value you will get; the bid price.
Use BID to see the actual price you would sell a stock for.
The Ask is the opposite of Bid. It is the price that someone is willing to sell the stock to you for. In other words, you should be looking at this when deciding whether to buy the stock. It is important to remind you again: Do not look at last price when deciding to buy the stock. Keeping with the house example, the ask price would be the price you would be willing to buy a home for.
Use ASK to determine if the stock price is in your budget.
Day’s Range shows you the lowest and the highest that a share has been traded for, in a day. This is important psychologically; it gives you an idea how far prices are moving. Day’s range is important in figuring out price trends – is the stock on it’s way up or down? This doesn’t mean that prices cannot go beyond these limits, just that it’s generally harder for them to do so.
Use DAYS RANGE if you are trading daily and were looking to gauge whether the price trend was moving up or down.
52 Wk Range
Like the Day’s Range, this shows you how high or low the price went for the last year (52 weeks in a year last I checked!) This is slightly more useful than the day range, as it sets stronger boundaries which means it established stronger trends. You can be certain that if the price is approaching either boundary, chances are it will reverse its direction. This means that if it is near the 52 week low, it might be a good time to buy the stock.
Look at the 52 WEEK RANGE if you are a long term investor trying to make strategic buy & sell decisions based on historical data.
Just like a scale measures weight, market cap(italization) measures how big a company is. The “B” in this cell stands for Billion. As in $126 Billion (Dr. Evil voice optional). The Market Cap gives you a good idea of how important the company is in the overall economy. The bigger the cap, the bigger the impact. It is also useful to classify and measure companies with ratios such as the P/E Ratio (mentioned below). Understanding the Market Cap can be tricky: For more information about market cap classification, click here.
Use MARKET CAP to get a sense of how big a company actually is compared to other companies. MARKET CAP is important when used along with ratios like P/E RATIO and EPS as company ratios should always be compared with similarly sized companies.
P/E (Price to Earnings Ratio)
The P/E Ratio is also known as the Price to Earnings Ratio. Basically, it shows you what people are willing to pay for a dollar of that company’s earnings. Confused? Not too worry – what you really need to know about this is that low P/E ratios suggest the stock may be under-valued, but also may have no growth prospects. Similarly, a high P/E ratio could indicate that a stock is overvalued or that people expect big things from the company. Higher or lower to what? Always compare a company’s P/E ratio with companies in the same industry and of the same size – A higher P/E ratio compared to the industry suggests either that the stock is overvalued or people expect bigger things from this particular company than all the others in that industry.
Use P/E RATIOS to measure whether a company is undervalued or overvalued. Always compare similarly-sized companies in the same industry. Always.
EPS (Earnings Per Share)
This is the company’s earnings (revenue-expenses) divided by the amount of shares issued. Many people consider EPS to be the most important measure of company’s success as it shows how much money the company is making for its shareholders. Hint: note down the current EPS in notes section of My Trades and compare it to the EPS in the future to see if earnings have been growing or slowing down.
Use EPS to measure a company’s growth or lack of. A growing trend usually indicates that a company will continue to grow and growing companies reward shareholders. This is valuable stuff!
Div & Yield
Div (Dividend) is simply the amount the company pays back to each shareholder, usually every three months (quarterly in stock market speak). The Dividend Yield shows you the percentage of the stock price you can expect to make in a year with dividends (even if the stock price rises or drops).
DIV & YEILD would be important to you if receiving a regular income from your stocks was part of you investment strategy.
The Price Chart
This graph charts the different prices of BP stock over time. The red line (at the bottom) marks the price that BP closed at last trading day (Remember Day’s Range? This is Day’s Range visually). The tabs at the top of the graph change the timeline so that you can see the stock price over different periods of time.
Knowing how to read stock quotes can help you increase your chances of trading or investing successfully. It can help you better estimate whether or not a particular stock has potential to go up or down by giving you a good estimate of demand for it. Remember that the market price of anything – stocks, commodities, etc. – is dependent on the supply and demand for that “anything”. In the case of shares of stock in the stock market, the supply is relatively fixed. And given that demand is the only thing that’s variable, the ability to make a quick estimate of demand is crucial for successful stock market investing. The quicker you’re able to get a good estimate, the better your market timings can be and consequently, so will your profits.
Another way the ability to read stock quotes can significantly increase your chances of investing successfully in stocks is you can have a better estimate of it’s “optimal” value, i.e., the price at which most market participants believe that stock’s price should be at. It’s easy to get caught up in a herd mentality, i.e., buy when everybody’s buying and selling when everyone’s doing the same. But if you know at which price level, based on reading quotes, a particular stock’s price tends to gravitate, you can go against the current and defy the herd – and laugh your way to the bank!
If you’re a beginner, it may take a while to master the art of reading stock quotes but as with most of the best things in life, it’s worth all the effort!
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