Investing in stocks is an exciting way to grow your wealth over time. However, for many new investors, the world of stock charts can seem like a complex and daunting language. Don’t sweat it. This beginner’s guide will equip you with the knowledge to interpret these charts with confidence, empowering you to make informed investment decisions.
 

Global stocks are a great go-to for building wealth and hedging against a volatile rand. As more South Africans become upwardly mobile, international shares are taking centre stage as new investors seek stability and growth in increasingly uncertain times.

If you’re a new investor, you’ll know that stock charts can feel like a foreign language at first, bombarding you with an information overload. Now, let’s turn confusion into clarity by running you through the basics.

Why use stock charts?

Stock charts are a visual representation of a share’s price movement over a specific period. They provide valuable insights into market trends, price volatility, and potential buying and selling opportunities. By learning to read and understand these charts, you can gain a crucial advantage in managing your investment portfolio.

The main chart types, aka the big three

There are several ways to represent price movements graphically, but three main chart types dominate the investment landscape: line charts, bar charts, and candlestick charts. Each offers a unique perspective on the markets and caters to different analysis styles.
 

1. Line charts: Clean-cut ’n clear

Line charts are the most basic and user-friendly type of stock chart. Think “girl next door”: simple, unassuming and easy to appreciate (no doubt why Shyft loves her so!). Line charts depict the closing price of a share for a chosen period, typically days, weeks, or months, connected by a single line. This format allows for easy visualisation of long-term trends, making it ideal for identifying periods of growth or decline.

The pros:

• Simple to understand: Perfect for beginners.
• Focuses on the big picture: Highlights overall trends.
• Easy to compare: Quickly compare price movements across different stocks.

Line charts are excellent for:

• Getting a quick overview of a share’s price history.
• Identifying long-term trends, like uptrends or downtrends.
• Making preliminary investment decisions based on overall market direction.

The limitations:

Line charts, while useful, offer a limited view of price movements. They don’t show the daily high and low prices, making it difficult to assess volatility within a given period.
 

2. Bar charts: A stickler for the details

Bar charts provide more information than line charts. Think of him as the fastidious study buddy who may be a little hard to understand – but once you get him, everything just clicks!

Each bar represents a specific period (e.g. day, week) and is divided into sections. These sections typically depict the opening price (left side), closing price (right side), high price (top line of the bar), and low price (bottom line of the bar). This allows for a more comprehensive understanding of price movement within a chosen time frame.

The pros:

• Shows opening, closing, high, and low prices: Provides a more detailed picture.
• Identifies periods of volatility: Highlights price fluctuations within a time frame.
• Can be used with technical indicators: Often used alongside technical analysis tools.

Bar charts are beneficial for:

• Examining price movements within a given period.
• Identifying potential trading opportunities based on volatility.
• Combining with technical indicators for more advanced analysis.

The limitations:

Similar to line charts, while detailed, bar charts can appear cluttered for short time frames. They may not be suitable for visualising long-term trends effectively.
 

3. Candlestick charts: The quirky storyteller

Candlestick charts are visually engaging and detailed, and a popular choice among many investors. She’s that eccentric neighbour who always has an interesting anecdote that you’ll inevitably share with others in your circle.

Each candlestick represents a specific time frame and comprises a body and two wicks (sometimes called shadows). The body reflects the difference between the opening and closing prices. A filled body indicates the closing price was higher than the opening (bullish), while a hollow body suggests the opposite (bearish). The wicks represent the high and low prices within the time frame.  

The pros:

• Visually appealing: Easy to identify price movement patterns.
• Detailed information: Depict opening, closing, high, and low prices in a single element.
• Identify buying and selling pressure: Candle patterns can signal market sentiment.

Candlestick charts are ideal for:

• Examining detailed price movements and identifying support and resistance levels.
• Spotting potential buying and selling pressure based on candlestick patterns.
• Implementing technical analysis strategies.

The limitations:

Candlestick charts can be overwhelming for beginners due to the complexity of patterns and interpretations. We’re not trying to talk you out of them though! It’s just essential to learn and understand these patterns before using them effectively.

Beyond the basics

Remember, each of these charts serves a different purpose and suits individual preferences. As you gain more investing experience, you can explore more complex chart types and integrate technical indicators for advanced analysis.

And if you still feel uncomfortable taking on charts with your investment experience after reading this, reach out to a financial advisor.

Shyft remains committed to empowering you to take control of your financial future. With our platforms (app or web app), you can access a variety of investment opportunities and tools, including clear and concise line charts to help inform your decision-making. So take a gander at our other articles and use what you’ve learned to take your money game global.