How to Understand a Stock Quote

For many years, stocks have possessed a certain intrigue that is unparalleled when assessing investment opportunities. They are virtually a ticket to own and be a part of the story of a business. Shares can be obtained by just about anyone willing to take a chance with their investment dollars.

Each weekday there are millions of orders routed through the major financial exchanges. In reality, the market acts as an auction house for buying shares of publicly traded securities. Only when buyers and sellers agree on a price is an order executed. The key data points communicated to the exchanges in order to come to an agreed-upon price are what create a stock quote. Before interpreting a stock quote, one must first understand the data and what each of the points represents.

Initially, stock quotes can appear confusing, but once their components are broken down, they provide a valuable snapshot of a company.

Understanding Stock Quote Data

When a buyer or seller places an order for a specific stock several key pieces of information need to be included, such as the security of interest, its ticker symbol, the price that the buyer or seller is willing to pay for or sell the shares at, and the number of shares to buy or sell.

Below is an example of what a stock quote looks like, using a historical example from 2014 to illustrate the concept:

The bid and ask prices shown on a stock quote represent the highest bid price and the lowest ask price for the security in question. In this sample case of Microsoft Corp. (MSFT) above, the highest price that buyers are willing to pay is $46.39. On the other hand, sellers are only willing to sell shares for $46.40.

Many stock quotes will also show the number of shares that are available for trading at both the bid and the asking price. Stock prices are subsequently determined by changes in supply and demand. As more investors demand to buy shares, the price of the security rises. As more sellers become available, the increased supply of shares available will then send prices lower.

The data point found in the "last trade" field is the price at which the last trade was executed. This figure is often compared to the closing price from the previous session. After a trading session is closed, the last traded price is used to create various charting types such as the line chart.

The opening price is the first trade price that was recorded during the day’s trading. This figure is often used in relation to the current price or the closing price from the previous trading session in an attempt to quantify the stock's movement.

Typically, the previous closing price will be the next session's opening price, but this is not always the case. A sharp change between the last traded price and its open generally suggests that a stock is experiencing strong momentum, either positive or negative depending on whether the current session's opening price is higher or lower than the previous session's closing price. It often represents an interesting trading opportunity. The day’s high and low are also common data points found within a stock quote. This data is generally used by traders as a measure of volatility.

How Does Quote Data Appear on a Stock Chart?

One of the most popular charting types incorporates stock quote data by highlighting the open, high, low, and close. As you can see from the chart below, the notches on the bar indicate the price levels where MSFT opened and closed.

The left bar represents the open while the right bar represents the close. You’ll also notice that in the situation where the close is below the open, the bar will usually be colored red. Furthermore, the top of the bar represents the day’s high while the lowest point on the bar represents the day’s low.

Digging a little deeper into the numbers on a stock quote can reveal even more useful information and be extremely beneficial when comparing companies in similar industries. The market capitalization (or market cap) is the total dollar value of all the company's outstanding shares.

Shares short is the number of shares that are being sold short. These are shares that are borrowed with the hopes that they will go down in price. Short interest as a percent of shares outstanding conveys what percentage of total outstanding shares are sold short, but haven't been covered or closed yet. Investors use this figure to forecast the direction of the particular stock, or the market in general, and to assess investor sentiment.

The dividend, distribution of company earnings to shareholders, represents the amount paid out per share. The ex-dividend date is essentially the cut-off date to which a holder of the stock is entitled to a dividend payment. If purchased on this date or later, the holder will not receive the dividend.

The pay date will be the day the dividend will be paid to shareholders, while the dividend yield is the percentage paid out per share on an annual basis relative to the share price.

Earnings per share is the sum of earnings paid per share in the last 12 months. The price-to-earnings ratio, or P/E, is a ratio that measures the level of earnings received in regard to price. This ratio can be effective in determining which companies are of greater value. Typically, a lower P/E is ideal when analyzing companies categorized in the same industry.

Meanwhile, beta measures a security's sensitivity to the overall market. For example, a beta of one means the stock moves with the market, while a beta of 1.1 indicates the stock moves 10% more than the market.

The Bottom Line

Stock quotes consist of many data points. It's important that traders understand the key data points such as bid, ask, high, low, open, and close. Being able to analyze this pricing and trend data allows traders and investors to make better-informed trading decisions.

The key is to not allow the extensive series of numbers to discourage you when a quote shows information. Quotes are an excellent way to compare companies in industries that are alike. For some, these financial snapshots of numerical data for publicly traded companies can provide immediate perspective on whether or not a company is a worthwhile investment.

How to Hedge Surging Commodity Prices When Implied Volatility Explodes

Commodity prices have rocketed higher, and the rally has made it challenging to use options to hedge your exposure. Typically, you might consider using options contracts if you want to buy or sell and limit your risk.

If you thought corn or oil prices had moved too high too fast, you might consider using a put to bet on a decline in the price. One of the issues you might face if prices have raced is that the premiums charged for buying options have accelerated sharply.

One of the ways you can gauge if options are expensive or cheap is to chart at-the-money options' implied volatility. Implied volatility is the market’s view of future volatility and is the component used to price call and put options.

From the implied volatility chart of the Teucrium Corn ETF (CORN), which holds Chicago Mercantile Exchange futures contracts, you can see that implied volatility has spiked to the highest levels on record for this Corn ETF.

Let’s assume you owned CORN and wanted to keep your position but did not want to purchase a put because implied volatility is so high. You can offset that cost of the put by buying a zero-cost collar. When you use this trading strategy, you purchase an out of the money put and simultaneously sell an out-of-the-money call.

Since you are buying and selling options, your exposure to high levels of implied volatility is mitigated. The deal you are making is that you are willing to give up some of your future upsides to protect yourself from a decline in the price. The zero-cost collar gets its name because the value of the purchase is offset by the call you sold.

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