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What Determines the Closing Stock Price?

Original post by Slav Fedorov of Demand Media

The closing stock price is the last recorded trade of the day that gets reported in stock tables and daily stock quotes and is used in some daily stock charts. Many professional investors and traders finalize their stock positions in the last hour of trading. Their action often determines the closing stock price and may be indicative of their sentiment and intentions.

Interpreting the Closing Price

A stock's closing price can be compared to the previous day's closing price or the day's opening price. A stock is said to have closed up, or higher, when it closes above the previous day's close, and down, or lower, when it closes below the previous day's close. A stock that closes higher than it opened shows strength; a stock that closes lower than it opened shows weakness.

Reaction to the News

Stock prices often move in reaction to news, but it's not the news that determines the stock prices but rather investors' reaction to the news. How a stock opens shows investors' initial reaction to the news, but how it closes shows what they think about a stock going forward, after factoring in all the news.

Institutional Action

Professional investors typically finalize their stock positions in the last hour of trading, so how a stock closes is much more important than how it opens. Institutions account for three-fourths of all stock trading; their actions often move stock prices. Institutional buying can cause a stock to close higher for the day; institutional selling can cause a stock to close lower for the day.

Short-Term Trading

A stock's closing at or near its high for the day on a strong up-day indicates a lot of buyer enthusiasm that can spill over into the following trading day, with the stock price often gapping up (opening at a much higher price than the closing price of the previous day) at the open. Some short-term traders buy stocks that run up into the close to sell them into the gap-up the following morning for a quick profit. This buying can add to a stock's strong price run-up in the last minutes of trading. A strong run-up into the close of a small stock is often indicative of short-term speculation.

Manipulation

Since investors pay close attention to how a stock closes, manipulators may try to steer a stock into a close that suits them: if they want a stock to appear strong so they can sell into the strength, they may try to push the closing price up; if they want a stock to appear weak so they can buy on the weakness, they may push the closing price down. Manipulation can often be detected when a lackluster stock suddenly jumps or drops on a few small trades right before the close.

                   

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About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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