When you invest in stocks for the first time, you will discover that there are lots of tools at your disposal to help you find winning investments. You can use level two price data, you can scan through companies’ financial records, and you can scrutinize price charts to help you find cheap stocks.
It is the stock charts that I want to discuss in this blog post because I think every stock market investor should at least know how you can interpret charts as an investor. What I like about price charts is that they are widely available, and although you can subscribe to a charting software provider, you can often get these charts free of charge.
For example if you read this Zecco Trading review, you will learn that price charts are available to you when you register an account. In fact this is generally the case with most of the brokers that you can join online.
If you check out some other reviews, including this review of Tradeking, you will soon discover that you don’t have to get your charts from anywhere else. You can simply access them through your broker, which is a lot more convenient.
So how useful are these charts, and can they help you generate greater returns from your stock market investing?
Well I should emphasise that you don’t have to use any charts at all. Warren Buffett, for example, doesn’t spend his life scanning through stock charts when deciding what stocks to buy or when to buy. He is more interested in the multi-year earnings prospects of various companies.
Of course he might look at price charts to see how the share price has moved in recent times, and whether or not it is trading at low levels. However I cannot believe he uses any indicators, like so many investors do.
I personally believe that technical analysis has it’s merits, but these indicators are more useful for traders and short term investors. For instance if you are looking to bank profits in a few weeks or months, then it really does matter what price you buy the shares at and you will almost certainly want to invest in stocks when they are oversold as indicated by certain technical indicators.
If you take a long term view, just like Warren Buffett, then your original purchase price is not overly important. Providing that the chosen company is growing it’s earnings and it’s dividend payouts each year, then the share price should continue moving higher, so the price you bought the shares at doesn’t really matter that much.
So the message I want to convey is that price charts certainly have their uses when investing over weeks or months because timing is very important. However if you are buying shares for years and years, then you may only want to have a quick glance at the price charts before you enter into positions.