The slider in TV financial programs broadcasts stock prices at an astonishing rate. Disney at $185 a share! Apple $128! Wow, the caterpillar jumped over $240!
It’s exciting to watch stock prices bounce up and down, but it can be hard to get an idea of whether to buy, sell or hold. It makes more sense when you know how stocks have traded in the past, how risky the investment is now, and how the company has performed.
If you are already investing in the market or want to get started, you must know how to read stock prices to estimate the value of a stock and how it is performing. This helps you know if you want to buy or sell.
Stock quotes from financial websites or search engines provide much more information than the current price you see on a TV slider or read about in a general article.
Once you know how to read stock prices, you’ll have a better idea of whether a stock can be overpriced or a bargain. You can also see if investor interest in the stock is increasing, stable or declining.
Learn how to read stock prices
For this story, we’ll break down common items in stock quotes into three types of information:
- How are stocks traded now?
- How stocks have been traded in the past.
- What represents a stake in the company.
Knowing this information will put you in a better position for successful investment in the stock exchange. Here, we build on the helpful tips in our site Investing for Beginners: A crash course on making your money grow. Think of it as Investing 101, and then this as Investing 202.
How are stocks traded now
The most prominent price in stock prices is the last price at which the stock was bought or sold. If you buy or sell shares of a widely recognized company when the stock market is open, your next trade should be close to that price.
There are some situations where your trade may not be executed near the last price. If you are trading in small stocks or a company that just announced its quarterly results or important news, you should check the actual prices of other investors or traders who want to buy or sell shares. If you don’t, you can get a price you weren’t expecting.
Bid and demand
If you plan to sell, look at the offer. This is the best price another investor would be willing to buy the stock if you place an order in the market. If you want to buy the stock, you have to look at the ask, which is the lowest price someone will accept to sell the stock to you or anyone else.
The difference between the bid and ask price is the “spread” and it’s a cost, just like driving a new car out of the dealer’s territory. You know how someone always says when you buy a new car, it loses 40% or some of that number for the minute you drive away from the car? The same is true for buying stocks in the market. Most of the time, the spread is just a penny or two for the most popular stocks.
Closing and opening
The closing price is the stock price as of the last trade of the previous trading day. If it’s Monday, it will be Friday.
The opening price is where the stock is trading at the beginning of the current trading day. If there is a significant difference between the two, there may be news about the company overnight or over the weekend, such as a company making a major acquisition or a monster product offering.
Market value, or market capitalization, is the total value of a company’s outstanding shares. Investors divide companies according to their market capitalization, because stocks of larger companies tend to be safer than smaller companies and smaller companies tend to yield more returns on average than larger (though riskier) companies.
This difference between big, safer stocks and smaller but riskier stocks is why mutual fund companies offer big capital and smaller funds.
Just because a company is small doesn’t automatically mean it will go up faster than every high-volume stock, and big companies aren’t always boring either. The market capitalization of companies (such as Lehman Brothers and the original stock of General Motors) can go down, and likewise it can rise dramatically. Apple used to be a small cap company, but it has grown into a “mega” company worth more than $2 trillion. Apple has paid off a lot for its investors, right?
How are shares traded on the stock exchange?
The 52-week range gives us an idea of the stock’s past performance and volatility. It’s the difference between the stock’s highest and lowest price in the past year. Instead of a range, you can see a 52-week high and a 52-week low.
Don’t get too caught up in whether the company is at the top or bottom of its scale. It can go up, and unless it’s at zero, it can go down. The range is useful, but what really matters is whether the price is justified when compared to the company’s future prospects.
Understand the size
Volume is the number of shares traded on that day and gives us an idea of how easy it is to buy and sell at market prices (professionals call this liquidity). The number alone doesn’t tell us much until you compare it to the size on the graph. If the volume suddenly goes up, you should check the latest company news.
It is also important when trading minimally traded stocks. Most of us are unable to disrupt the Apple or Tesla stock market, but even small orders can be difficult to execute on small stocks. This is one of the many good reasons not to buy small stocks unless you understand what you’re doing. They can easily leave you penniless.
Before you buy or sell shares of a small business, check the size. If your trade is large compared to the average daily volume, you may get a different price than the quoted bid or ask price or the closing price of the previous day because you will flood the market. Some of the announced bids or ask prices are only good for 100 shares.
Learn about the beta of the stock price
Beta is the term used in the financial world to compare the risk of a stock compared to the rest of the stock market. One beta is a natural hazard. A beta of less than one indicates that the stock will not go up or down as much as the market. Utility stocks have predictable earnings, so they tend to have low beta issues. For example, Detroit-based DTE Energy (NYSE: DTE) recently got a beta of 0.63.
A trial version of more than one means that the stock has fluctuated more than the rest of the market. The higher the beta, the more upside you should expect to get when you buy the stock, and the less surprising if the stock drops more than the rest of the market. Tesla (OTC: TSLA) stock had a beta of 2.
What does the company’s share represent?
Some stocks pay a cash dividend, which is regular cash paid to stockholders. The dividends included in the quotation are usually the dividends paid over the past 12 months. The following information will help you understand more about the language of stock quotes.
Understanding the return
Yield is the expected return as a percentage rather than a dollar number. A dividend yield of 3% means that for every $100 invested, the stock has paid $3 in dividends over the past year.
The more a company pays its dividends in cash, the less it is available for expansion. That’s why growth companies don’t pay high dividends and mature companies with lower growth opportunities do. Slow-growing companies pay high dividends to reward investors for owning their shares, since they are less likely to appreciate in value than growing companies.
dividend yield value
Companies report their after-tax earnings as “profits.” The more profit your stake generates, the more valuable your stake in the company will be to potential buyers. Earnings per share, or EPS, is a company’s net profit divided by the number of publicly traded shares.
The price-to-earnings ratio, or P/E, lets us know how much each dollar of profit costs in the stock price. It is the stock price divided by the last 12 months of the company’s earnings.
The higher the price-earnings ratio, the more optimistic the market is about the stock. Value investors look for stocks with low dividend rates but excellent prospects. This may be a bargain, but not if the company is in trouble. Different industries have different P/E ratios, so compare the ratio of the company you’re after with other companies in the same industry.
For example, in mid-May 2021, the P/E for Apple was about 27.9 compared to about 13.4 for Samsung. So you can imagine the market is more optimistic about Apple than Samsung. Caterpillar and John Deere, who make heavy farming equipment, were closer, 38.74 and 34.59, respectively. This tells you that the market is pink on both.
stock price study
As you become more familiar with how to read stock prices, you will become more comfortable – or at least aware – about the volatility of the markets.
Eventually, you will begin to identify the natural movement and when you should check the news to see what is driving these big price changes. he deserves it. Learning how to read stock quotes is an essential step toward becoming a confident stock investor.
Contributor Sam Levine is a Chartered Financial Analyst ® and Chartered Market Technician® ® rating holder and has written on financial topics since 2003. He is an Assistant Professor of Finance at Wayne State University in Michigan.