Stocks tell a story. Here's how to read them.

Stocks have the ability to tell a story to anyone who takes the time to read it. After doing some research and understanding the basic terms, you too can read a stock quote, stock graphs (also referred to as stock charts), and financial statements like a pro.

When investors log on to their brokerage platform to check up on their favorite company, they will likely retrieve a stock quote. A stock quote gives an instant picture of valuable information that can’t be overlooked.

Typically, a stock quote will include several key data points:

1.  Last Trade: The dollar price representing the most recent transaction.
2.  Trade Time: The exact time corresponding to the most recent transaction.
3.  Change: Dollar amount and percentage change corresponding to how much a stock is up or down in a day.
4.  Open: Dollar price corresponding to the stock’s first trade of today’s session.
5.  Bid: The highest price a buyer is willing to pay for a stock. When combined with the ask price information, it forms the basis of a stock quote. 
6.  Ask: The lowest price at which someone is willing to sell the security. When combined with the bid price information, it forms the basis of a stock quote.

Now that we have gone over the basics of reading a stock quote, let’s move on to reading a stock chart.

Unlike a stock quote, a stock graph tells a story of how a stock performed over a given amount of time. The most common time frames include one-day, five-days, one-month, six-months, year-to-date (i.e. since January 1), five-years, and maximum.

Investors can look at a stock chart to find patterns. For example, if a chart shows a stock tends to rebound when it drops to a certain level, short-term or swing investors may look to buy the stock at that amount. Technical traders refer to this as a level of support.

On the other hand, if a stock rises to a certain level and then proceeds to fall without fail then technical investors may look to sell their position near that dollar amount. This is referred to as a level of resistance.

More advanced investors and traders look at charts to extract much more information. For example, the relative strength index (RSI) evaluates a stock’s chart against either the performance of a broader sector or a major index. The RSI can help investors determine if a stock chart is overbought or oversold at any given time.

A company’s financial statements should never be overlooked because they can tell a lot about the performance of a company. Every company is required to disclose to investors their financial performance every quarter, or every three months.

A financial statement is broken down into several categories. Here is an example of what you might find in a TSX-listed financial report.

First is the consolidated balance sheet which discloses a company’s assets (anything that has monetary value), liabilities (money owed to others), and shareholders' equity (leftover value which belongs to shareholders). The magical formula is consistent: assets = liabilities + shareholders' equity.

Second is the consolidated income statement which shows how much revenue a company collected in a time period and what the costs were to operate the company during that same period. Many investors jump straight to the “bottom line” which is literally the final line of the income statement which says how much money was earned or lost. This is also known as net income.

Finally, the consolidated statement of cash flow details the total amount of cash entering the company and the total amount exiting during the reported period.