RSS feedIn our first series of posts, we will be dealing with the most basic part of analyzing stocks - how to read a stock quote (or stock table). We will be using the quick chart on bigcharts.com as our guide for this series.
This is a basic stock quote and represents the kind of information that can be found in virtually every stock quote on any other website or in any newspaper. (Props to anyone who can tell me which stock this chart corresponds to.) The quote gives you, at a very quick glance, what basically amounts to a stock’s daily vitals. From left-to-right and top-to-bottom the chart include “last”, “change”, “open”, “high”, “low”, “volume”, “percent change”, “yield”, “P/E Ratio” and “52-Week Range.”
Last corresponds to the latest price of a stock. Some places may list this as “price” or “close.” For example, a newspaper might list this price as “close” since it is the price of the stock at market close for the day before the newspaper was printed. When it comes to investing or trading stocks, this number, the price of the stock, is the name of the game. The hope is that we can spot stocks which are selling for a cheap price, buy them, and then sell them when the stock price has increased. But, how can we know if we’re paying a good price for a stock or not? While the immortal investment tenet is “buy high - sell low,” when you get into picking stocks, you quickly realize that high and low are very relative qualities. How, then, can we tell if Google (GOOG) at $200 is cheap and Yahoo (YHOO) at $40 is expensive? Well, it all starts with being able to check the rest of the stock table.
Some numbers in a stock table can be used to determine a stock’s current performance - specifically its performance today. Change and Percent Change correspond to how much the stock’s price has changed since its previous close. Volume tells you how many shares of the stock have been bought or sold during the day. Open tells you the price of the stock at market open (surprisingly often not the same as its previous close). High and low tell you the high and low prices that the stock reached during the day. So, what exactly can these daily quantities tell you? Aside from the obvious (i.e. a stock devaluing greatly in one day is usually not a good sign and a stock price shooting up is usually a good sign), these numbers can actually tell you quite a lot. For example, a price increase on high volume gives you a hint that the rest of the market really likes this stock because a lot of volume that leads to a price increase corresponds to a lot of buying (basic economics - if a lot of people want to buy, the price is going to go up). In another case, there are some out there who believe that a stock closing at a price nearer to its high price than its low price signals momentum for a stock continuing to gain the following day (more on this when we get to stochastic indicators).
The other information in the stock table gives us more general information about the stock and a little bit of insight into the company behind it.The 52-week Range gives us the high and low values of the stock’s price over the last year. This is an interesting number to look at because it gives you a general idea of how a stock is performing relative to its past performance. The 52-week Range does, however, tend to be misleading especially to those new to the stock market. It is easy to get trapped in the idea that the 52-week Range marks the maximum and minimum values for a stock’s price and this is simply not the case. A stock trading near the bottom of its 52-week Range may be trading at a discount or it’s price may be representative of unprecedented poor performance and a harbinger of further depreciation. A stock trading near the top of its 52-week Range could be having unprecedented good performance and ready to make new 52-week highs or could have hyped above its true value and be on the cusp of a downturn.
The last two values are ratios. P/E Ratio, is a ratio of the company’s current price divided by its earnings per share. This gives us a small idea of the relative “value” of the stock. A high price to earnings ratio would imply that you’re paying much more for each share than the amount of money the company actually earns for a holder of each share. Since owning a share in a company is technically part ownership of the company, this is something you’d probably weigh heavily in deciding whether or not it is worthwhile to own shares in one company versus another. Yield is a ratio (expressed as a percentage) of annual dividends paid by a company divided by the current stock price. If you were to compare investing in the stock market to putting your money in the bank, you could think of this as the “interest rate” of your investment in a company. It is money you will definitely be making because of your “part ownership” in the company. Many companies have decided not to pay dividends and as a result you will sometimes see N/A as the value for yield. Some stock quotes may forego calculating yield and simply have a value of annual dividend.
And, there you have it, the basic “vital signs” of a stock. It is understandable if you are still wondering why anyone would ever care about the numbers that are in a stock quote. Afterall, can volume or yield or 52-week range really help you make better investments (and make money)? In the next few posts, we’ll dive more deeply into some of the values presented in a stock table and see exactly how they can be used to make better stock picks.
Next Up - P/E Ratio
November 8th, 2006 at 12:48 pm
that was really helpful =D