A step-by-step on how to read stocks and make sense of the market
Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and you know after 20 years investing, with more than half of that as a professional analyst, I forget sometimes that the stock market can seem like a foreign language for new investors.
I think the analogy is a great one because, yeah, trying to read stocks and make sense of it can seem like a jumble of numbers and percentages…but just like learning a new language, once you crack it, it’s like a new world opens up.
And Nation, just like a new language, what surprises beginner investors is that you only need some basics to see a lot of those benefits.
When I first came to Colombia to do private consulting around the free trade agreement in 2006, I knew very little Spanish. Nobody spoke as clearly or slowly as the tapes I had studied and by the first week, my head was spinning.
But I focused on the basics; nouns, the tenses and conjugating verbs…all the things that use to put you asleep in high school, and after another few weeks I could carry on a conversation.
That’s what I want to help you do in this video, show you how to read stocks so you can understand that stock market conversation. I’ll show you how to read a stock quote and separate out the important information from the noise. We’ll also look at how to use this information to compare and find the best stocks.
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Why Should You Learn How to Read Stocks?
I’m doing the video as part of a three-video series on stock analysis. In our next video, I’ll show you how to make sense of the financial statements to dig deeper into that stock market analysis. Then in our third video, I’ll reveal the 11 financial ratios every investor must know.
I’m excited to get into this video because I KNOW it’s going to change the way you look at stocks and give you those stock analysis tools you need.
Track your entire portfolio, see the gaps in your investments and compare two stocks instantly with my Portfolio Tracker spreadsheet.
How to Read a Stock Quote
I’ll be using the stock quote page from Yahoo Finance because it’s free and accessible for everyone but you get the same thing on any investing app or platform. So the first thing you’ll see is the name of the company and the ticker symbol which is how you find a stock.
Now a lot here isn’t that important for analyzing the stock. Yeah, the stock price is important but doesn’t really tell you much until you look at some of this other info. So working down that left side first;
Previous close and open are just where the stock was at the end of the last trading day and where it opened today. The bid and ask are pretty much the same for any large company. This is how much someone is offering to buy the stock and the price someone is offering to sell in the market, and there’s so much investor demand for most stocks that these are going to be very close.
The only time you’ll see a big difference in the bid and ask price of a stock is in smaller penny stocks and that’s when you want to place what’s called a limit order when you buy the stock. That means you put in the price you want to buy it at on your investing platform, rather than just accepting any price in the market.
The 52-week range here is the highest and lowest the stock has been over the last year, so helpful in seeing if the stock has jumped or fallen. You can also see this if you click on the chart to the right for that one-year time frame.
With this volume and average volume, here we’re getting to the useful information for stock analysis. This is the number of shares exchanging hands on that day and the average, usually over a 20-day period. How you use this is as a confirmation signal for moves in the stock price.
So if a stock has a big jump or a drop in price but that day’s volume of shares traded doesn’t go much over the average, then how strong was that move really? The fact that volume spikes on these changes in stock price, either higher or lower, is a clue to how much conviction or confidence there is for this move by investors. So just remember, big jump in volume means high conviction for the change in price. A daily volume traded that’s below the average volume means the market isn’t quite sold on whatever made the stock move.
The market cap is the market value of a company. It’s the stock price times the number of shares available, so what investors are saying this company is worth. That’s going to be important when we start looking at valuation in our third video on ratios.
This Beta is an interesting one but neglected by a lot of investors. Beta tells you the volatility or riskiness of a stock compared to the overall market. So the market Beta, how much it moves up and down on a daily basis, is set at 1.0 and if we look at the S&P 500 fund, the SPY, then we see it has a beta of one. Then a Beta above one, like here we see Apple has a beta of 1.17 – that means shares of Apple tend to move 1.17-times the move in the stock market, both higher or lower. If the stock market went up 1% then you can expect shares of Apple to increase around 1.17% and conversely if the market fell by 1% then you’d expect shares of Apple to fall by about 1.17%.
Now of course this isn’t always going to be an exact change. There’s news coming out daily that may take shares of Apple higher or lower relative to the rest of the stock market. This Beta just tells you, on average, how much more volatile or risky the shares are on a statistical basis.
Beta is a really underappreciated tool among investors. How you use this is if you’re trying to put together a safer portfolio, you would look for stock picks that had a lower beta. For example, if you were investing in shares of Groupon, the stock has a beta of 1.76 which means those shares are going to be a wild ride. If the broader market plunged 10% then you’d expect shares of Groupon to fall about 18% so much riskier than the rest of the market. On the other hand, shares of stocks in the Utilities sector, we’ll use this Utilities Select Sector SPDR fund, ticker XLU, this fund has a beta of just 0.44 – less than half the market beta. So we’d expect this the share price of this fund to be less than half as volatile as the market. If the overall market fell by that 10% then this beta of 0.44 tells us, we’d expect the price of this fund to fall by only about 4.4% over the same period.
Next we’ve got the price-to-earnings ratio, this PE ratio, and this is probably the most popular metric in investing but you always want to double-check this number you see in a stock quote. Sometimes the quote page will be off a little so look for the company’s earnings per share reported over the last four quarters and divide the price by that number to double-check this.
The PE ratio is a measure of how expensive a stock is, the price investors are willing to pay for each share of stock compared to how much in earnings the company is making per share. It’s a quick-and-easy measure but you have to be careful here. There are a lot of ways management can manipulate earnings, lots of shenanigans it can play on the income statement to make those earnings look higher so I’ll review some better price ratios in our third video with that ratio analysis.
But if you are using the PE ratio, there’s two ways you want to use it. You can compare the stock’s current PE ratio, so we see that Apple is trading right now for 25-times its earnings per share…but where has it traded in the past? In fact, if we look back, we see Apple was trading as low as 15-times just last year and has been as low as 10-times price-to-earnings in the past so we can say that shares of Apple are expensive right now on that PE ratio versus its past.
You can also compare the company’s PE ratio against its competitors. If we look at shares of Microsoft then we see it’s trading at a price 30-times its earnings per share. So we can actually say that while Apple maybe is a little expensive compared to its own PE history, it’s still relatively cheaper than shares of Microsoft with that 25-times PE ratio.
This is a big part of stock analysis, comparing some of these ratios against competitors and even against the broader group of stocks in its sector. That makes it one of my favorite tabs in our Portfolio Spreadsheet I developed. With the spreadsheet, you can put in two stock symbols here so we’ll do Nike and Coca-Cola here, click compare and the spreadsheet is going to pull all this financial information from the internet.
You can compare the price-to-earnings ratio of a company against the average for the sector as well as against another stock. We’ve also got the price-to-sales ratio, some of these profitability measures like the operating margin and profit margin and other comparisons for debt-to-equity and dividend yields.
Just a few more notes on the stock quote page here. This dividend and dividend yield is the amount the company pays out on a yearly basis, so Apple pays $3.28 in dividends per share over a year, and then divided by the stock price for the dividend yield. So that $3.28 divided by $319 per share means Apple pays a dividend yield just over 1% a year and remember, that’s paid on a quarterly basis so you’ll get about $0.82 a share every three months.
This one-year target estimate is nice but you have to take it with a grain of salt and do your own analysis. This is the average target price from the Wall Street analysts tracked by Yahoo Finance. Here you see that analysts have a target price just under $309 per share for the next year, which kind of confirms the idea that Apple is a little expensive here at $319 per share, but if we look at analyst estimates on my ETrade account, we see an average target price around $318 per share. So this average is always going to be subject to the analysts polled and whether they’ve updated the information, so use this only as a confirmation or check on your own analysis for the stock.
Stock market investing doesn't have to seem like a foreign language. Learn how to read stocks and a whole new world of returns will open up and allow you to pick the best investments in the market.