Beware of the Stock Chart

I can remember back as a recent college graduate looking up stock charts to see which stocks had the best return over a 1 year, 5 year, or 10 year period, hoping to find that company that showed an increase each year. Little did I know that I was not getting the whole picture of the returns.  This way of investigating a stock caused me to overlook great companies that actually performed well for their investors, but on the stock chart appeared flat over a period of time.

HERE’S WHY SOME STOCK CHARTS ARE OFTEN LACKING

Reason #1

There are stock charts out there that do not account for any dividends that the company paid out during the timeframe an investor held that stock. For instance, you may look up a company that was trading at $50 per share 10 years ago, and is now only trading at $52 per share. Most people immediately think that the investor would’ve only received a $2 per share increase in capital gains over the 10 year period. That may be true, but if this was a company that paid a dividend each year, the total return would’ve been much higher. To break it down, let’s say this same company trading at $50 per share 10 years ago paid a dividend of $2 per share each year. This means your investment at the end of 10 years would be equal to the share trading at $72 per share because you received $20 per share in dividend payments and had $2 per share in capital gains. That’s quite the difference right?

Reason #2

Some stock charts do not account for stock splits. Occasionally, a company will split their stock, 2 for 1. This action reduces the price per share in half, but doubles the number of shares outstanding. To give an example, if an investor owns one share of a company trading at $100 per share and they initiate a 2-1 stock split, the investor will now on 2 shares of the company and the stock will be trading at $50 per share. The total value of the investment remains the same, but the investor now owns more shares. If a stock chart does not account for stock splits, then you may look at a 10 year period and miss the fact that an investor may own twice as many shares even though the price per share may seem lower or the same.

Reason #3

Another area that is typically not accounted for is stock spinoffs. Sometimes  a company may have a business that is unrelated to their main area of production and choose to spin off that particular business into a whole new business entity of its own. In return, companies will sometimes give their existing shareholders shares of this new company as well. There’s value in that type of transaction because an investor would now own shares in two companies and a stock chart will typically not reflect that.

I will say that more and more stock charts are starting to account for the dividends and stock splits, but you may have to manually select that option as it may not show them as the default setting. An investor still needs to be aware of the chart they are looking at and what it’s accounting for.  As an investor, remember that you’re looking for “total return”, not just an increase in share price.  That tip alone will set you apart from the majority of investors out there.