What is a Line Graph
A line graph, also known as a line chart, is a graph that measures changes in values over time and is represented by individual data points connected by straight lines.
BREAKING DOWN Line Graph
In finance, line graphs are the most frequently used visual representation of values over time. They are frequently used to represent changes in the prices of securities, company revenue sheets, and histories of major stock indexes. They are also useful for comparing different securities. Despite the benefits, there are limitations. For example, line graphs often lose clarity when there are too many data points. Furthermore, the apparent degree of change can be visually manipulated by adjusting the range of data points on the axes.
Constructing a Line Graph
Line graphs consist of two axes: x-axis (horizontal) and y-axis (vertical), graphically denoted as (x,y). Each axis represents a different data type, and the points at which they intersect is (0,0). The x-axis is the independent axis as its values are not dependent on anything measured. The y-axis is the dependent axis as its values depend on the x-axis's values. Each axis should be labeled according to the data measured along the axis and divided in appropriate increments (e.g., day 1, day 2, etc.). For example, if measuring the changes in a stock's prices for the previous two weeks, the x-axis would represent the time measured (trading days within the period) and the y-axis would represent stock prices. When using line graphs to track the price of a stock, the data point used is the closing price of the stock. On day 1 of trading, the stock's price was $30, resulting in a data point at (1, $30). On day 2 of trading, the stock's price was $35, resulting in a data point at (2, $35).
Each data point is plotted and connected by a line that visually shows the changes in the values over time. If the value of the stock increased daily, the line would slope upward and to the right. Line graphs can be constructed manually or with better accuracy using software, such as Microsoft Excel.