Imagine that you don’t speak a word of French and one day, suddenly, you find yourself trying to navigate the busy city of Paris. You’d likely have some difficulty reading the street signs; in fact you’d almost certainly struggle to read the street signs. This is the same problem confronting people trying to figure out how to read the stock market. It’s a problem of recognition which through its deficiency, leads to trouble. In the case of trading and investing, it can lead to serious loss of money. Strap in then, we are going to show you the essentials of how to read the stock markets.
How To read The Stock Market – Fundamentals
When it comes to how to read the stock market there are two basic pillars that you need to be familiar with. Consider these the broad categories under which everything else falls. Those two categories are Fundamentals and Technicals.
Fundamentals refer to the market’s foundational aspects. Is the market going up, or is it going down? Are there any economic factors that could affect the fundamental behavior of stocks. Interest rates for example tend to affect stocks. When rates are high, earnings in companies tend to fall thereby causing the price of stocks to fall.
When rates are low the opposite happens and increased earnings lead to an increase in the value of stocks. Other fiscal and monetary factors affect the markets as well; government policy can have serious impacts on the value of the stock market.
How to Read The Stock Market – Fundamentals and Individual Stocks
Fundamentals affect the markets on the macro level, but they also affect stocks on the micro level too. The difference is that with stocks, the fundamentals are somewhat different. In a company for instance, your fundamentals will be things like earnings/revenue. Metrics like earnings affect the long term prospects of a company. If earnings are rising then there will be investor confidence and the stock will see demand thereby pushing its valuation higher. But it’s not just earnings that affect confidence; a stock could see weakened confidence if the bottom line (costs) are not managed properly. Many companies have gone bust simply because they earned on the top line but failed to adequately keep costs down. The end result is a loss and losses don’t translate very well on Wall Street.
How to Read the Stock Market – Technicals
The technical side of how to read the stock market is best applied to individual stocks but there’s a top-level reading that you can apply to the markets. In the screenshot below you’ll notice an area boxed in red. That area is a snapshot of the markets; it offers a composite view of the different indexes and their movement on the day.
In terms of individual stocks the readings are quite different. In the next screenshot you’ll see a snapshot of Apple Inc. (NASDAQ: AAPL). The area labeled A contains a few important chart metrics. Inside that box is the price of the stock currently; also there are your readings for 50 and 200 moving averages (MAs). AAPL is, based on those readings, trading above both its 50 and 200 MAs.
The box labeled B contains the reading for the Relative Strength Indicator (RSI). Measured over 14 days, this metric shows whether a stock is overbought or oversold. 50 is neutral while anything below 50 is considered headed toward oversold. Above 50 a stock is headed toward overbought territory. In the case of AAPL, the reading suggests that valuation is just above neutral. 30 or below is considered oversold, meaning more investors are selling rather than buying AAPL stock. 70 and above is considered overbought which means more investors are buying rather than selling AAPL stock.
That’s the basics of how to read the stock market. It gets deeper than that, but those basics will help you on the way to trading stocks and investing. And while we are on trading stocks, we sometimes alert our newsletter subscribers of hot stocks that we research. Those alerts are free to subscribers so if you are interested you can sign up for alerts here.