How to Read the Stock Market

How to Read the Stock Market

If you are able to read the stock market and make smart investments, then this will prove highly lucrative for you in the long run. This Buzzle article will help you to understand how to go about interpreting the highs and lows of the equity market.
You may have heard about terms like, buying and selling of shares, market charts, bulls and bears, etc. However, many of us fail to understand the basic information related to stocks. We hear our neighbors cribbing about losing money in shares or our colleagues suddenly becoming richer than before due to their smart equity investments in the stock market. Businesses earn high profits and many even register loses due to the intriguing game of this market. This profit made by a business, is then annually divided among the shareholders in the form of dividend. An individual must keep a tab on the right prices and market conditions to buy or sell stock in order to make profit.

A stock market is a place where brokers trade company stock, and other listed and privately traded securities. They can be exchanged either physically or virtually in the market. Buyers and sellers trade them according to their needs. There are two types of share markets:
  • Primary Market: New public offerings or issues are traded between sellers and buyers in this type of market.
  • Secondary Market: Previously launched stocks which are already present in the market are traded by the buyers and sellers in this particular market.
Understanding the Basics
If you want to become a hard-core investor, then learning to understand the basics will help you a lot. Here are few terms which you should know about.

Stock Prices: The position and performance of the issuing company directly affects the price of a stock. The price is then multiplied by the number of outstanding shares known as market capitalization. The company's future growth, current performance and expansion are key factors that help determine its share prices. When a company gives a poor performance, the share prices fall and when it performs better than expected, they skyrocket.

Stock Market Charts: A typical stock exchange chart or quote will give you the current status of its performance. Depending on the trade, it will change on a day-to-day or intraday basis.

52 Week High and Low: The data of the last 52 weeks is displayed on the reporting date with details of the highest and lowest prices.

Type of Stock: There are specific symbols written after the name of the company to represent that it is a preferred stock. If no symbols are mentioned, then it is a common one.

The Ticker Symbol: This is the abbreviation of the company name. Companies use these short forms so that their names can fit on the actual ticker tape. All the major stock exchanges in the U.S. like the New York Stock Exchange, American Stock Exchange and NASDAQ allow one to four letter abbreviations. These are like the old heraldic symbols used by the British. A new company can make its own short forms but different from the ones that are already in use. For example, Intel uses INTC, AAPL stands for Apple Computer Inc., KO abbreviated for Coca-Cola Co., etc. There are certain symbols that have one or two extra letters led by a period to explain something more specific about the company. For example, BRK.B stands for a share from Berkshire Hathaway Inc. which is of a lower value 'Class B' stock.

Dividend Yield: When both the columns of dividend per share and dividend yield are filled, it indicates that the company is making profits and distributing it to the shareholders in the form of dividends. The dividend yield is calculated as the number of annual dividends per share divided by the price per share. The dividend yield represents return on the dividends.

P/E Ratio: Price/Earnings ratio is calculated by dividing the latest market price of each share by the average earnings per share, from the last four quarters.

Trading Volume: This shows the total selling and buying transactions, for that particular day.

Closing: The last price of the stock quoted at the close of the day's trading.

Net Change: This is the difference between the price, since the last change. It shows the direction of the price of the stock. It is represented by a plus or minus symbol, to represent the direction change.

Bulls and Bears: The bull market represents rising equity. This is a healthy economic indicator. Businesses and people earn a lot of profits from selling stocks in the bull market. A bear market is the completely opposite of the bull market. Bear markets represent economic downfall, where investors sell out their stocks anticipating a further fall in the prices. Many businesses and people lose money, and are financially destroyed during the bear phase if they have mistimed their stock buying and selling. The rule is to buy low and sell high.

A newcomer in the stock market world will face initial difficulty in understanding it. However, with time you will develop a sense of 'safe' and 'risk' when trading in stocks. Do not focus on the fancy indicators, just keep a track of the price movements. Your interest as an observer will change into a seasoned investor's outlook, as soon as you develop thorough knowledge about the equity market. With a bit of caution, start chasing the bulls and bears!