*This article is for information, and basic education only. It does not constitute for financial advice & is not intended to be relied upon. Financial actions should be taken at your own risk. For specific advice, please speak to an independent financial advisor*
Our access to investing is being made easier and easier every day. You can now invest at the tip of your fingers thanks to the many mobile investing apps out there. But with so much information, you may find yourself a bit bamboozled when it comes to understanding the numbers you are looking at. In this article, we’ll break down the essentials you may see on Investing apps, explaining the key things you need to focus on and how to interpret them.
The app we use is Freetrade and on that we see...
This is the price of a single share within a company. The original share price is determined when a company first lists on the stock exchange. The price is determined using market forces - which is the perceived supply (how many shares the company is willing to sell at a certain price) and demand (how many shares investors are willing to buy at a certain price).
If you’re ever wondering about why prices go up or down, it is because demand and supply moves. If more people want to buy a share (an increase in demand) and the number of shares remain the same, you will see the share price increase. Or, if the more people want to sell their shares, increasing the supply - the share price would fall…which is what we saw happen after Donald Trump got permanently banned from Twitter. 2 days before the former president was forced off the site, the market closed with the Twitter share price at $54.53, and a few days Trump got banned the price of a Twitter share fell to $47.04.
Question to think about when looking at the Share Price:
Can you afford the current price? Apple is listed at $127.14 per share (at the time of this article). Are you able to comfortably purchase a share without needing the $127.14 at a later stage and having enough money (in both your day to day money and savings) to live comfortably?
You should also think about what is most likely to happen to the share price in the future? Are there any events coming up, for example a new launch or a change to the law which may alter the amount of people that who want to buy or sell Apple shares?
Share Price Chart
The chart that you see taking up a large amount of space on the screen is the Share Price chart. This is a visual representation of the movements of the Share Price. Think of it as a story, the $127.14 price of an Apple Share just gives a snapshot of the price at this moment in time. Whereas a chart shows you the entire chapters and how that Share Price has moved. In fact, seeing the entirety of Share Price movements allows you to put fluctuations into perspective and make a good assessment of whether it's a good time to buy, sell or hold the share. For example, if the price of an Apple share is at $127.14, but we can look on the chart to see that last week it had a price of $145 then you will come to conclusion that last week was a much better time for the Apple share.
And you can find the perfect chart for you depending on what time period you want to view. A chart with a longer period of time, for example, monthly or yearly allows you to uncover any underlying trends. An example of this is when Apple release a new iPhone, the stock markets may always behave in a certain way. Whereas a daily chart allows you to delve into the detail, looking at the prices and volumes of stock on a minute by minute basis.
We love to use charts to identify patterns, trends and anomalies, in order to make better informed decisions.
Stock Markets have trading times too. Open price is how much the stock trades at when the stock market begins business for the day. When the New York Stock Exchange opens at 9:30am, the first price that will appear is the open price.
And yes, there is a Close Price. This is the price of the share when the market closed at 4pm on the prior day.
It would make sense that the opening price is the same as the closing price? Well it’s often not. The world keeps spinning after the markets close, so whether it’s an announcement, news event, natural disaster or even a tweet (just look at Elon Musk and his twitter antics that have been known to send the Tesla stock plunging). And when these events do happen, or investors decide they want to sell shares after the stock market has closed for the day, all of the out of hours activity can mean large amounts of orders placed at prices after the closing price happen. These ‘out of hours’ events can change investor expectations, attitudes, movements, which is why the open price for a new day and the close price for the previous day aren't the same.
Market High & Low
When we talk about High & Low as investment terms, the high refers to the highest closing price of a stock over a period of time. The low is the minimum prices for a share in the given time period.
You might see something called the ‘intraday’ high and low, this is the shares highest and lowest points for the day.
The next figure to look at is Market Capitalisation (market cap for short) This is value of a company that is traded on the stock market. It is a great way to understand what the market thinks a company is worth. It is calculated by multiplying the total number of available shares (held by the company and publicly traded shares) by the present share price.
It can really help you swerve when it comes to making a bad judgement.
Think of it this way…A company with 20 million shares sells each share at £100, as 2 million x 100 is £2 billion, this company will have a Market Capitalisation of £2 billion. The company would be known as a ‘Mid-cap company’ as they have a capitalisation value between £2 billion and £10 billion. These are companies that are likely to grow and are relatively strong players in the game. They’re not as risky as small cap companies as there is a lot more potential for steady growth (they’ve already done it before to reach a capitalisation value between £2 billion and £10 billion, right). Another example is a company that has shares valued at £1,000 each but they are a lot smaller and only have 10,000 shares outstanding, so 1000 x 10,000 gives us a Market Capitalisation of £10 million. This would be classed as a small cap company as the market value of companies is from $300 million to $2 billion. Companies that are small cap tend to be those that are emerging and thus are deemed more riskier thanks to their limited resources and intense competition.
Which leaves us to the BIG players, those companies have a large market capitalisation value. Companies that are called ‘large-cap’ are usually over £10 billion. These are your tried and tested companies that are bringing in the ‘big bucks’ as they usually have a good reputation for producing high quality goods or services, a track record of paying out high dividends and producing strong financial results. As they are usually established, you tend to see less risk attached to large cap companies. If you want a short snappy guide on it, we have our breakdown here.
You may be thinking what is a Dividend? A Dividend is a share of a company's profits and retained earnings that they pay out to their shareholders at the discretion of the company's board of directors. Not all company's pay dividends and it is not guaranteed. But if you are lucky enough to receive a Dividend, you might want to know what a Dividend Yield is.
Dividend yield measures the proportion of company’s earnings paid to shareholders (dividends) relative to the value of a share
You’ll normally see it a percentage form on investing apps, but it is usually calculated by dividing the dividend per share by the market price per share and multiplying the result by 100.
If you are investing based on Dividend payments, then the higher the better. A company with a high dividend yield pays a substantial share of its profits as dividends.
Price to Earnings (P/E Ratio)
This is all about the market value of a stock when compared to the company's earnings. It measures the price of a share relative to the annual net income earned by the firm per share. It is a great indicator that shows how much the market willing to pay at this point in time for a stock based on its past or future earnings.
When investors predict growth, the P/E Ratio ratio is going to be higher. The average P/E for the S&P 500 companies ranges from 13 to 15, and those that are growing faster than average, let’s say a technology company have a higher P/E Ratio than this. The best way to look at the P/E Ratio is when you compare a company’s historical P/E or a competitor’s P/E ratio. And remember a higher P/E Ratio is good as it shows that investors are willing to pay a higher share price today because of growth expectations in the future.
With a solid understanding of the numbers you see on investing apps, you are well on your way to becoming your own Investment analyst!