PDSnet Beginners Course

Beginners Course Module

Module Name Publish

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In the first module you learned about saving and budgeting to build a capital base. In this module we will assume that you have a budget and you are accumulating your capital base. Here we will begin to look at how you go about choosing shares and timing your transactions.
 
When you buy shares in the share market you are immediately in the business of forecasting. You are predicting that the shares you have bought will go up in price – otherwise you would not have bought them. So how can you improve your chances of being right in predicting that the share you buy will go up?
 
The only way to predict the future is by studying the past. The only reason that you know the sun will rise tomorrow is because you have seen it happen before. If you had not seen that happen many times before, you would not expect it to happen tomorrow. If you think about it you will realise that all your predictions are based on your past experience. So, if you want to know what a share is likely to do in the future you must begin by looking at what it has done in the past and the best and easiest way to do that is with a graph or chart.
 
A chart can show you how a share has moved in the past and that can give you a feel for how it might move in the future.
 
Share price charts are drawn with the date along the horizontal axis and the price on the vertical axis.
 
Let us look at an example of the share price of Lewis between 12th May and 3rd June 2022:
<img src="http://www.pdsnet.co.za/onlinecourse/images/Picture1.png" />
 
Notice first that unlike other charts, this chart has its vertical of price axis on the right-hand side. That axis shows the number of cents that the share closed at on the day in question. The dates of each closing price are given on the horizontal axis at the bottom of the chart.
 
So, you can see that on Thursday, 12th May the share ended the day’s trade at 4643c – or R46.43. Shares prices on the Johannesburg Stock Exchange (JSE) are always given in cents per share. The closing price of a share is the price at which the last transaction took place on that trading day. The trading day is the time during which the shares of companies listed on the JSE can be traded. It begins at 9am in the morning and ends at 5pm in the afternoon.
 
If you look across the chart you can see the prices at which Lewis shares (LEW) closed on each trading day from 12th May 2022 to 3rd June 2022. It is important to understand that there is no trade over the weekends, so the prices recorded on the chart above are as follows:
 
 
Thursday 12th                    4643c
Friday 13th                        4796c
Monday 16th                     4714c
Tuesday 17th                     4700c
Wednesday 18th                4942c
Thursday 19th                  5000c
Friday 20th                        4960c                                               
Monday  23rd                     4981c
Tuesday 24th                     4991c
 
Wednesday 25th                        5000c
Thursday 26th                              5000c
Friday 27th                                     5187c
Monday 30th                                 5178c
Tuesday 31st                               5200c
Wednesday 1st                           5019c
Thursday 2nd                               5100c
Friday 3rd                          5100c
These prices are then connected with a line to give a picture of how the share price is moving over time.
 
If you are not familiar with charts of this type take a little time to look at each day’s price on the vertical axis.
 
Obviously, the above example only covers 17 trading days of the Lewis share price. Usually, you will need far more history to be able to see a pattern – but even over this 17-day period you can see that Lewis shares were in a rising trend.
 
The above chart is a chart of the daily closing prices of Lewis, but investors usually prefer to look at a Candlestick chart because that shows them more information about what happened during each trading day.
 
Every trading day listed shares are traded on the JSE. During the day, the prices of these shares can vary quite substantially. A candlestick chart shows the highest and lowest prices that the share traded during the day (called the “high” and the “low”) as well as the price of the first trade and the last trade (called the open and the “close”). Together these four prices make up the day’s candle. Consider the following chart which shows two candles for Transaction Capital (TCP) for 1st and 2nd June 2022:
 
The left-hand candle shows the high, low, open and close for TCP on 1st June 2022. The body of the candle is coloured green because the close was above the open price. The body is the space between the open and the close. The second candle shows what happened on 2nd June 2022. On that day the share closed below its open price and when that happens the body of the candle is coloured red.
 
You will also notice that on both days, the share traded both above and below its body which you can see in the example above as the vertical lines above and below the body. These are sometimes also called shadows.
 
We will conclude this module by showing you the Lewis chart that we gave you above, but this time in the form of a candlestick chart:
 
You can see that the candle chart gives you far more information about what happened in each day’s trade. You can see whether the day had a large range of trade or small one and whether the share closed close to its highest or lowest price.