Stock charts can be confusing and overwhelming for beginners. You might wonder what those unfamiliar terms, dates, and numbers mean. Curiosity is an excellent quality to have, especially when you are planning on investing your hard-earned money. I struggled a lot at the beginning of my investing journey, so I know the feeling. Hopefully, by the time you finish this article, you understand these metrics well and can go on with your investing journey.
While understanding the basics of stock charts is a great advantage, it isn’t necessary for you to start investing. Investments like index funds are designed for beginners. Click here to learn more.
Let’s use the Microsoft stock chart as a visual example for our analysis.
Stock Source
Meaning of the most relevant terms
Previous Close: The last price the stock traded the previous day. In our example, it was $249.22.
Open: This is the first price of the stock trade in the current day. In our example, It was 249.22. This means that you could have purchased or sold the stock at that price when the market first opened.
Bid: This is the highest price an investor is willing to pay for the stock. In our example, investors are willing to buy the stock at 250.27 per share.
Ask: This is the lowest price an investor is willing to sell the stock for. In our example, sellers are currently selling for $250.28 per share.
Day’s range shows the highest and lowest prices the stock has traded for up to this point.
Volume: The number of shares traded so far that day. Swings in trading volume can give you a sense of how much strength there is behind a stock. For example, if a sock price is increasing and it has above-average volume, it indicates investor enthusiasm for that stock is strong and can potentially lead to more buying and even higher prices. On the other hand, a stock with a decrease in price plus a low volume indicates limited investor enthusiasm. While there isn’t a specified number to determine a high amount of volume, typically, trade at a volume of 500,000 or more is considered high.
Market Cap (market capitalization): Measure the size of a company. To get this number, you multiply the price of a stock by the total outstanding shares. For example, a company with 15 million shares selling at $25 a share would have a market cap of $375 million. Market cap helps investors to compare companies.
Why is market cap important?
Market cap is essential because it helps investors analyze a company’s size and expected growth and risk.
Market cap is often used to organize stocks into Large-cap, Mid-cap, and Small-cap categories.
- Large-cap companies have a market value of $10 billion or more. These are primarily stable companies with a reputation for producing quality goods and services. Also, they typically have a history of consistent dividend payments and steady growth. Microsoft and Apple are Large-cap companies.
- Mid-cap: these are companies with a market value between $2 billion and $10 billion. In most cases, these are well-established companies that are expected to grow rapidly in the future. Mid-caps may have a higher potential for growth than Large-cap, but they may be riskier.
- Small-cap: these are companies with a market value of $300 million to $2 billion. They are start-up companies with the higher risk of the 3 categories. However, they also have the most potential for growth out of all three.
Beta
It measures the volatility of a stock as compared to the volatility of the stock market, like the S&P 500 or a total stock market index. In other words, it measures how rapidly and unpredictably the stock price increases and decreases compared with the overall market. This is very important for investors as it indicates the risk of a particular stock.
A beta greater than one indicates that the stock has historically been more volatile than the stock market. Betas less than one but greater than zero indicate less volatility than the market overall.
In our example, the beta is 0.92, meaning this stock is less volatile than the overall stock market. People who don’t like to take significant risks, like to invest in assets that have low betas, such as Treasury bills and utility stocks. Those with a higher risk tolerance may invest in stocks with a higher beta.
PE ratio
This stands for the price-to-earnings ratio. It measures the current share price of a stock relative to its earnings per share. This determines if a stock is undervalued, overvalued, or fairly valued.
To get the P/E ratio of a company, you must divide the current stock price by the earnings per share (EPS). However, the majority, if not all, stocks like the one in this example already have the P/E ratio displayed on their chart, so you don’t have to do anything.
You can use the S&P average P/E ratio as a measuring tool to determine if a stock is fairly valued. Considering that the S&P average P/E ratio has historically ranged from 13 to 15, you can conclude that a stock with a higher P/E ratio indicates that investors are willing to pay a higher share price today because they expect this company to have significant growth over time.
In our example, the P/E ratio is 27.78 for the last 12 months. We can infer this is a relatively high ratio, and investors expect significant growth over time. However, if no significant growth is expected, perhaps you want to reconsider this stock as it could be overvalued.
(TTM, refers to the past 12 consecutive months of a company’s performance data for reporting financial figures.)
A high P/E ratio and low growth expectations could signal an overvalued company. You may want to avoid it!
A low P/E ratio plus high growth expectations may indicate an undervalued company and a good buying opportunity. For example, a P/E ratio of 11 could indicate that the stock is undervalued and has some upside potential.
In other words, you can make money!
EPS
Stands for Earnings per share. This is a company’s net profit divided by the number of common shares it has outstanding. EPS shows how much money a company makes for each share of its stock. You can use this number to determine a company’s value.
Although you don’t have to do the calculation yourself since it is displayed in the stock chart, here is how you do it if you want to do it yourself. Divide the quarterly or annual profits by the number of outstanding shares of the stock and there you have it. If the company pays preferred dividends, you must subtract those from the earnings.
In our example, the EPS is 9.00 for the past 12 months.
A stock with strong EPS growth could indicate a good investment opportunity. Oh the other hand, if you see a downturn trend, you might want to reconsider this stock or do more research.
What is a good EPS?
You might be wondering what a good EPS is, but there isn’t a specific number. As a point of reference, you can compare two companies from the same industries to get an idea. For example, you can compare Microsoft and Apple stock because they are both technology companies. Comparing companies from the same industries may give you an idea of what to expect.
Some companies like Amazon have a negative EPS, meaning they are losing money, but that alone isn’t an indication that you should not invest in it. It could be that the company is heavily investing in growth.
Conclusion
After all, you can analyze these metrics so you have an idea of where a company stand. However, it is essential to note that past numbers don’t reflect what will happen in the future. It is just a reference point.
As mentioned before, you can start investing without knowing all these terms and numbers. Index and ETF funds are great options for beginners. Click here to learn more about how to invest.
Investing information provided in this blog post is solely for educational purposes. Neither IsaveFuture nor its subsidiaries offer advisory or brokerage services, and we do not recommend or advise investors to buy or sell specific stocks, securities, or other investments.
