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How to Read Stocks: Tips for Better Investments

Stock research and stock analysis should be the basis for your stock picks. See what to look for when buying a stock.
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Financial Expert
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Managing Editor
man trader analyst looking at desktop to read stocks
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Key Takeaways
  • Earnings per share (EPS) is generally reported on a trailing twelve-month basis.
  • The price-to-earnings ratio shows how much you would have to pay for every dollar the company makes.
  • Find an online broker with competitive commission rates to reduce the cost of making trades. Those rates can be as low as $0 per trade.
  • Stocks are assigned a unique ticker symbol to avoid confusion when trading. Use this symbol to specify the exact stock you want to buy or sell.

Owning individual stocks is a step toward becoming a more active investor. This step isn’t for everyone, but it can become a lifelong interest for those curious about the stock market — and maybe even a way to make a little extra money.

Learning to read a stock chart and research potential buys is like learning a language. A little knowledge can be enough to get started, but if you want to become fluent, you need to practice.

While not every investment you make will pay off, each should be an opportunity to learn and improve.

How to Pick Stocks: DIY or Use a Professional?

Many people own stocks through mutual funds, but picking individual stocks is a whole other level of investing.

Mutual funds typically own large numbers of stocks. The benefit this provides is diversification, meaning that no one stock will have too big an impact on your overall return.

When you pick individual stocks, you are ratcheting up both the potential risk and the potential reward. This means some intensive study should go into any individual stock you own.

The basic question you should ask yourself about owning individual stocks is whether you want to pick them yourself or have a professional do it for you.

A professional financial advisor is likely to have more experience and resources than most individuals when it comes to picking stocks.

On the other hand, if you have specialized knowledge or business experience that you feel gives you unique insights into certain companies, you may want to make some picks yourself.

Even if you decide to have a professional pick your investments for you, knowing some of the basic language and principles of stock-picking can help you ask the right questions and better understand what that professional is doing on your behalf.

Compare Online Investment Advisors & Robo-Advisors

The best robo-advisors allow you to invest in various financial products, including mutual funds, stocks, and bonds. Shop and compare online brokerages to find the lowest fees and opening balances.

Basic Stock Research: How to Read a Stock Chart

A variety of finance websites produce stock charts like the one shown below.

At first glance, this may look confusing, but when you break it down into its individual parts, you’ll start to see it holds some of the basic information you’ll want when considering a stock.

chart

This is a chart for Apple Inc. stock, which is traded on the Nasdaq stock exchange. Some of the highlights you should look for in a chart like this are:

Ticker symbol

The company name is near the top of the chart, followed by the symbol “AAPL.” That is called a ticker symbol, and these play a very important role whenever you buy or sell stocks.

Sometimes, different companies can have similar names. Each stock is assigned a unique ticker symbol to avoid confusion when trading. When trading, you should use this symbol to specify the exact stock you want to buy or sell.

Ticker symbols can be a variety of lengths, but most are from one to four letters long. Always look up the precise ticker symbol for the stock you want to buy.

Share price

The share price of a stock may be reported in various ways, including the previous day’s closing price, the present day’s opening price, and the current price based on the most recent trade.

Since prices can move rapidly, the most important price to look at when you are about to trade is the current price. In this chart, the closing share price on May 22, 2020, was $318.89.

Earnings per share (EPS)

Earnings are the official profit made by a company. The total earnings of the company are divided by the number of shares to report the amount of earnings each share represents, or earnings-per-share (EPS).

EPS is generally reported on a trailing twelve-month basis — that is, for the most recent year. The trailing twelve-month period is represented by the abbreviation “TTM.” On May 22, 2020, the EPS for this stock was $12.73.

Price-to-earnings (PE) Ratio

Another common statistic you’ll find on a stock chart is the price-to-earnings or PE ratio.

This is the current price of the stock divided by annual earnings. The PE ratio for AAPL stock in this chart was 25.05. The significance of the PE ratio will be discussed in a later section of this article on price vs. value.

Line chart of price history

Stock charts are often dominated by a line chart showing the stock’s price history.

This helps create some perspective on where the stock is trading now compared to its previous price.

It’s important to select the right period when looking at price history. A short period, like a day or a week, might exaggerate short-term price fluctuations. On the other hand, a very long history, like 10 years, might include distant history that is no longer relevant.

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Bar chart of the number of shares traded (daily volume) history

You will often see a series of bars along the bottom line of a price history chart. This bar chart shows the daily trading volume of the stock.

Trading volume can put price changes into perspective – the heavier the volume, the more market conviction there is behind any price move. Also, looking at recent volumes can show that a very thinly traded stock may be subject to a large price move if volume picks up.

Stock Analysis: Assessing Price vs. Value

The price of a stock doesn’t tell you much beyond what you would pay to buy it now. The stock’s true value has to be judged by comparing the price to some of the company’s underlying financial characteristics.

The price-to-earnings ratio is an example of this. It shows how much you would have to pay for every dollar the company makes.

According to Macrotrends, the price-to-earnings ratio of the S&P 500 has averaged 17.21 historically. That means you typically would pay over $17 for every $1 of a company’s earnings.

This indicates that stock investors often have a very long-term outlook — enough so that they are willing to pay for many years of earnings upfront.

A high PE ratio can also indicate that investors expect earnings to grow quickly. While PE ratios are typically measured over the previous 12 months, investors are often hoping that earnings will be significantly higher in the near future. This growth would make the price more reasonable relative to future earnings.

PE ratio is not the only measure of a stock’s value. Price-to-sales ratio and price-to-book value are other common examples. The better you know a company, the easier it will be to determine which valuation measure is most relevant to how that company does business.

Getting to Know a Company: News vs. Hype

When learning about a company, it’s important to separate hard news from hype. Investment websites and TV programs are full of people trying to hype stocks, often because they own the stock themselves.

To look beyond the hype, follow a company’s periodic announcements about its progress. Companies will often try to spin their results, but a good way to judge a company’s progress is by how well it has succeeded in meeting the sales, earnings, and other goals it set out in previous announcements.

Creating a Wish List

More often than not, the market more than fully recognizes the value of great companies. In other words, it’s hard to buy an industry leader at a discount that would allow you to make a good return going forward.

However, even if the prices of your ideal stocks are too high at the moment, you can put together a wish list of what you would like to buy if they come down to the right price.

That way, when a negative event like a market correction hits, you’ll be ready to scoop up good companies at bargain prices. Meanwhile, maintaining that wish list allows you to follow the companies on that list for a while and get to know them better before you buy.

Being Mindful of Trading Costs

When you start buying stocks, be aware that trading costs will cut into your return. These costs include trading commissions plus the trading spread.

The spread is the difference between what sellers ask for a stock and what buyers are willing to bid for. In a strong market, stocks will trade closer to the asking price; in a weak market, the opposite is true.

Trading costs will hit you twice — when you buy and when you sell. These are known as the “round trip” costs of trading.

One way to reduce trading costs is to find an online broker with competitive commission rates. Those rates can be as low as $0 per trade.

Best Online Brokers for Stock Trading

Stock Market Analysis After You Buy: Setting Sell Triggers

Once you’ve bought a stock, the work of stock market research and analysis is not done. You should decide in advance under what circumstances you would sell the stock.

Your sell trigger might be a specific price target, but you should also consider certain other goals or events. For example, if a company starts failing to meet its sales goals, it may be a sign that its business model is not working as planned.

All of this is a lot to digest. That’s why many people choose to have a professional do their investing for them.

If you decide to do it yourself, the best advice is to start small. That way, you can learn without having too much money at stake.

Choosing the Right Brokerage Account for Your Stock Investments

Before you start picking stocks, you must pick a brokerage account to help you make your investments.

This is an important choice. Here are some things to consider:

  • Research the range of products available. Beyond stocks, in time, you may want to invest in bonds, options, mutual funds, or other types of investments.
  • Look at research tools. Some brokerage platforms offer extensive tools to help you research stocks. Beyond stock charts, this might include access to research, portfolio simulators, and other resources to help inform your decisions.
  • Consider the cost. Compare both trading commissions and fees when choosing the most cost-effective brokerage account for your trading needs.
  • Look at managed account options. Trading stocks is time-consuming. You may decide that you want to buy some stocks yourself while having the rest of your money managed for you. To keep those options open, consider whether the brokerage firm also has professionally managed or robo-advisor accounts available.

Before you decide, visit several different brokerage websites and look at their account terms and capabilities. Choosing the right broker may be an important first step toward all your other investment decisions.

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Financial Analyst
Richard Barrington, a Senior Financial Analyst at MoneyRates, brings over three decades of financial services expertise to the table. His insightful analyses and commentary have made him a sought-after voice in media, with appearances on Fox Business News, NPR, and quotes in major publications like The Wall Street Journal and The New York Times. His proficiency is further solidified by the prestigious Chartered Financial Analyst (CFA) designation, highlighting Richard’s depth of knowledge and commitment to financial excellence.