The basic idea behind volume is that it is a way of being able to accumulation or distribution of the stock during trading. That is, are investors buying (accumulating) or selling (distributing) the stock that day. To do this, one must look at the price change compared to the volume that day. If the stock trades on heavy volume and the price is increasing, the trading that day is buy dominated and shows that investors were willing to pay higher and higher prices for the stock. If the stock trades on heavy volume and the price decreases, then the trading that day is sell dominated meaning sellers are trying very hard to get rid of their stocks selling for lower and lower prices. If volume is high without an appreciable change in price, it could be a sign of a turn around in a stock’s current price movement. This is known as churning and is a sign that investors cannot really figure out what the price of the stock should be – i.e. whether or not it should continue to move upwards (if there is an upward trend) or whether or not it should continue to move downwards (if it is a downward trend).
Increasing volume day-after-day with a price movement skewed in one direction or another can be a signal that it’s time to either buy (if the price movement is positive) or sell a stock (if the price movement is negative). Something that can help in making these decisions is Volume+. This is a chart available on bigcharts.com in their interactive chart section. It shows volume in different color from day to day corresponding to price advances and declines as well as a moving average of day to day volume so you can see clearly when volume is higher than average.

Aside from looking for above average volume days, price and volume can be used together in a plethora of other ways. There is a whole branch of stock analysis known as technical analysis and specifically volume and price patterning that is based on the idea that certain chart patterns can be found in all stock movements when looking at price and volume charts. The use of these patterns can then be used to predict future stock price movement. As this is just the introduction to reading stock quotes, we won’t go into this right now but I do hope to touch upon some more involved technical analysis in a future series. So, keep your eyes peeled.

Some basic things to look out for if you would like to try to value some stocks right now are:

• Stocks that are making big gains with low volume or non-increasing volume are a signal that the gains are not going to continue for long so don’t buy into the hype.
• Similarly, price declines on low volume are often a sign of people who are weakly holding their position selling off and one can assume either a rebound or flattening out of the price chart is going to follow after those investors have sold their holdings.
• After a period of relatively stable prices (3 months+), a large price gain on high volume can be a sign that the stock is on its way to new heights – this is known as a break out.

This now ends our basic look at Reading a Stock Quote. At this point, we are able to make some decently well informed guesses as to the general value of a given stock and its current trends (up or down) with respect to its price and trading interest (volume accumulation/distribution). It’s not all the information that is necessary to make consistently winning stock picks, but it is a solid foundation from which to begin experimenting with making some stock picks and tracking their performance which I do recommend to anyone interested in beginning to invest. Start a portfolio on CBS markewatch, Yahoo! Finance, or use Investopedia‘s Stock Simulator and start to get a feel for it.

A stock with a guaranteed rate of return? No, it’s not some kind of miracle investment. The rate of return refers to the dividend paid by a company to its shareholders. Dividend is a portion of a company’s earnings which is distributed to its shareholders each year as decided by the company’s board of directors. It is usually quoted in dollar amount per share and the yield refers to this value divided by the current price of a stock. As such, when differentiating between bond yields and yield as it relates to stocks – one could use the term dividend yield.

So, why is dividend important? Well, for the most part, the only companies which offer dividends are secure and stable ones. Smaller, high-growth companies will usually make a decision not to offer dividends, but instead to re-invest earnings into the company to help sustain growth. In a way, you could look at dividends as a way to equalize the potential return on a more established business. Since big, stable companies tend to have stock’s whose prices do not move as much, the prospect of knowing you will definitely make a return through dividends is meant as an attempt to make an investment in these companies more attractive.

I personally don’t find dividend paying stocks to be the be all and end all of my stock search and thus, unlike P/E ratio, yield is not necessarily an important factor in my valuation. That being said, dividend paying stocks can serve as a valuable member of your investment portfolio. In uncertain or poor economic climates, it is always nice to have an investment which you know will pay you a return. Further, as said earlier, in all likeliness picking a stock which pays dividend means you are picking a strong, stable company which you don’t have to be afraid to hold long term. This is not just mere conjecture. Various studies have shown that dividend paying stocks in the have historically outperformed non-dividend paying stocks and also been historically less volatile. (some numbers can be found in this report by Allianz Global)

Investing based on yield can be a very good strategy for people with a long term focus who want more flexibility than CDs or Bonds but with equal or better rates of return. Creating a dividend/yield rate based portfolio can allow you to have a portfolio which generates a reliable source of annual return while also the potential for good growth in the initial seed investment. It does come at a higher risk than a CD or bond, but with the stability of most dividend paying companies, the investments, if picked correctly, should never suffer the type of volatility that scares most people away from stocks. Further, new tax law has made return from dividend taxed at only 15% versus the normal income tax on CD or money market interest returns. On the downside, the dividend/yield rate strategy also means that often times you will not be investing in the “sexier” stocks and, for the most part, will never find a tell-all-your-friends-at-dinner kind of stock pick that will make you 200% in a month.

Yield can be used several ways. First, in the creation of your dividend stock portfolio, you can aggregate yield numbers to calculate your expected yearly return and use this number to augment the expected returns based of the stock you are investing in and help you make a decision as to whether or not the stock’s value, volatility, and growth potential suit your portfolio. Also, yield rates can serve as a red flag for potentially bad companies. In general, you want to find yield rates above 4.5% (any lower and the investment is not much better than a CD and then you should focus on the actual return of the stock’s price changes as opposed to the dividend) but not in the upper stratosphere of yield rates (do a quick stock screen to see). The most important thing in finding dividend paying stocks is finding those that will pay consistent, sustainable dividends. Yield rates which are very high usually signal an unsustainable dividend or, worse yet, a desperate corporation trying to woo investors with its high dividends. Remember, don’t use yield alone to build a portfolio as dividends are not guaranteed and can be changed by the corporation at any time. These changes can also have a significant impact on a stock’s price as well so it is always a good policy to make sure that the dividend stock you are choosing is that of a strong company with at least moderate growth. After all, the most important return ultimately is not your return from dividends but from the buying and eventual selling of your stock.

If you are interested in learning more about dividend investing and how to find winning dividend paying stocks, check out these articles: Dividend Paying Stocks Guide from WinningInvesting.com and 6 Secrets to Finding Dividend “Money Machines” from Motley Fool.

Well, the P/E ratio seems simple enough, right? Given the definition above, we could come to the conclusion that, unless a company has very high earnings growth and strong projections, we always want to buy stocks with the lowest P/E possible. This, however, is not the case. P/E is a helpful tool in stock analysis but not meant to be the only tool.

First and foremost, P/E ratio is only as good as the earnings number that was used to compute it. For example, when you check newspapers and financial websites for a company’s P/E ratio, you might be confused as to why P/E ratios don’t seem to be the same in all publications or why you might see different types of P/E ratios called “Trailing P/E” or “Forward P/E.” This is because the method of calculating earnings can vary from site to site. Most of the time, earnings are calculated as the total earnings in the last four quarters. This type of P/E ratio would also be called a “trailing P/E” since it is comprised of information from the trailing four quarters or trailing twelve months (TTM). As you may be able to guess, forward P/E is based on estimated earnings for the next four quarters. Both TTM earnings and earnings forecasts are succeptible to all sorts of manipulation and it is important to be sure of the source and accuracy of these numbers.

Another issue with P/E ratios is that they are not really meant for making broad based comparisons. One should really only use P/Es to compare similar companies (i.e. those within the same industry possibly even of similar size). This is because, as stated earlier, P/E tells us how much we have to pay for each dollar of earnings of a stock and, as a result, low P/Es are only “low” if there is potential for earnings to grow in the future. Growth potentials, obviously, are different from company to company and differ significantly from industry to industry. As a result, it is impossible to make a broad statement like saying, “All stocks with P/E ratios less than 20 are cheap and buyable.” Instead, judging the “lowness” of a P/E ratio is really more based on intuition and it’s lowness relative to the company in question’s P/E history and P/Es of similar competitors.

So, what should we do with the P/E ratio? The P/E ratio is one of the most talked about and most heavily hyped stock valuation statistics and should definitely be considered whenever you are making a stock pick. What we should look for is “low” P/Es relative to a company’s industry and likely to its own historical averages. If these two criteria are met, then one could say rather safely that the stock is trading at a discount. That being said, a stock trading at a discount is often trading at a discount for a reason – nobody wants it. As a savvy and informed stock investor, it is your job to find out, through other research, why. If you can identify this reason and are comfortable that growth prospects are still strong despite whatever reason has depressed the stock’s P/E recently, then buy away!

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