What is a Line Graph?

A line graph connects individual data points that, typically, display quantitative values over a specified time interval. Also known as a line chart, it can be quite useful in depicting the changes in values over time.

Key Takeaways

  • A line graph connects individual data points that, typically, display quantitative values over a specified time interval.
  • Line graphs consist of two axes: x-axis (horizontal) and y-axis (vertical), graphically denoted as (x,y).
  • In investing, specifically with respect to the field of technical analysis, line graphs are quite informative in allowing the user to visualize trends, which can greatly aid them in their analyses.

Understanding Line Graphs

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. In investing, specifically with respect to the field of technical analysis, line graphs are quite informative in allowing the user to visualize trends, which can greatly aid them in their analyses.

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 most commonly used is the closing price of the stock. On day one of trading, the stock's price was $30, resulting in a data point at (1, $30). On day two 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. Conversely, if the price of the stock was steadily decreasing, then the line would slope downward and to the right. Line graphs can be constructed manually, or by using software, such as Microsoft Excel, which greatly improves the speed, and accuracy, of the end product.