If you struggled through a statistics class in a previous lifetime, then you know about chart reading basics. If you lack or conveniently forget about previous statistics courses, please know that I won't torture you with banalities about door-to-door brush sales averages. However, I do feel a responsibility to warn my readers about how statistics are often misrepresented through visuals like charts. While this lesson doesn't go into in-depth statistical generation, hopefully you and your children will grasp enough information to learn about how financial charts are used.

The easiest chart in the world to understand is represented by the type of chart that businesses use for most stock analyses. BUYandHOLD contains examples of price and volume charts that are easy to follow, so I'll use these charts for this lesson. So, if you head to BUYandHOLD's research section and click on one of the "top ten" holdings, you'll arrive at a page that illustrates two different charts and I'll walk you through their minor problems and major benefits.

The first chart, positioned at the top, is a price chart that demonstrates how a particular business stock fared financially over the past six months. The time is always listed at the bottom of a relevant chart, and to save space, this particular chart's time frame is shown below the second chart. The chart contains a faded graph line that delineates each month so that you can determine whether a spike dipped or peaked within a particular month.

The time frames represented within the graph lines aren't specific by date, but you can click on the "1D - 1M - 3M - 6M - YTD - 1Y - 3Y" or "1 day - 1 month - 3 month - "year-to-date" - 1 year - 3 year" links that are located to the bottom left of the two charts to find a more or less definitive representation. A 1-month chart, therefore, will display a chart that covers approximately 30 days; however, the days aren't marked, so you still need to do a little guesswork. Despite this problem - which is minor - you can still easily read how a particular stock fared financially over a given period of time.

The second part of this top chart that is essential for understanding a stock price is located vertically along the right-hand side of the chart's border. All charts that are "legitimate" charts will contain information concerned with the chart's title along this area. Since the title of this chart is about price, the information along this vertical space is about price as well, and the bottom line begins at the bottom and the high price is located at the top. However, if you click through several of these top ten companies, you'll note that the price never begins at "0." Why?

While most charts should begin with a "0," the BUYandHOLD charts (among many, many other financial charts online and in print) begin with a higher number at the bottom to save space. When space is saved, then ink, paper, and online real estate is saved. The bottom line is that money is saved, also, and that this charge isn't passed on to the consumer. A number is chosen to represent a bottom line, therefore, and you must imagine how this chart would appear if the bottom was filled out to an imaginary "0." While charts that don't include the "0" often seem to misrepresent information, most stockholders are comfortable with this common omission.

But, one problem occurs when you decide to compare one price chart against another when the "0" information isn't apparent. Say that you print two different price charts from the "top ten" and hold them next to each other. One chart begins with "3.40" and another chart begins with a much higher or lower number. In this case, you must either reinterpret the numbers along the side and create new charts or realign the charts to match. A third way to correct this problem is to understand that the numbers represent dollar amounts and that "3.40" is "three dollars and forty cents," an amount that is far different than a starting point that begins at "4.00," or "four dollars."

Once again, this problem is minor as long as you catch it on the front end. Always look for that "0" at the bottom of this vertical line. If this number isn't there, then you know that you need to compensate for that omission before you begin to compare one chart against another.

Take a look at the chart below the price chart. The title of this chart includes the word, "volume," so this chart measures the volume in stock sales and purchases over the same time frame that the price changes above this chart occurred. Since the price and volume charts are adjacent and matched to similar time frames, you can compare how the volume affected the price (or vice-versa) for any given stock.

The numbers along the left vertical edge of the volume chart represent the numbers of sellers and purchasers in "millions," and every one of the volume charts in the "top ten" begins with a "0" at the bottom. Therefore, these charts fully represent the millions of buyers that participated in a stock's activity from 0 up to 200 million or more sales or purchases. Now, when you print out these volume charts, you can hold them side-by-side and see an accurate head count - as long as you match the numbers. Some charts that contain more "millions" in volume will, as Cora says, "squish" the numbers together. So chart-readers must remember to check that the volume numbers match before they compare visuals.

Fortunately, stock charts are easy to comprehend and seldom misrepresent information as long as the reader knows how these charts work. However, other charts can skew information so badly that the reader might believe misrepresented information. Next week I'll introduce you to a few of what Cora calls, "magic tricks," so you know when you're being fooled.

Until Then,
Linda Goin