Why Is Open Stock Price Different Than Closed Stock Price?
Original post by Geri Terzo of Demand Media
The price at which a stock opens at the beginning of a trading session is considered a fair amount based on supply and demand for that security since the previous day's close. Investors continue to participate in the stock market even after the official trading session is over and can continue to place orders, including buy and sell requests, through brokers when the market is closed.
A bid reflects the price at which an investor is willing to buy an equity security. The ask price is the amount at which a stockholder wants to sell the security. The actual price for the security is based on the number of buyers in comparison with the number of sellers, which is a reflection of supply and demand. At the end of a trading session, a stock settles at a final price. Events may happen while the markets are closed, however, that can drive the price higher or lower before the market opens once again.
Public companies report earnings, which are an indication of profits and sales, on a quarterly and yearly basis. The news can potentially move a stock upward or downward based on whether or not results meet expectations. In order to prevent extreme volatility in its share price, a company may opt to wait until after the trading session is closed to reveal the results. The stock's subsequent opening price may differ from the most recent closing price based on investor response in between trading sessions.
The Nasdaq Exchange is an electronic trading platform based in the U.S. The exchange uses an electronic system to determine a fair opening price for a stock based on orders placed after the trading session closes. This system, known as "opening cross," aggregates all of the after-market orders. If there is an imbalance between the number of buyers and sellers, trading specialists are alerted, giving them a chance to create more balance by placing orders. The fair price is set based on a combination of orders from investors and specialists.
Broader economic conditions that unfold overnight could affect where stocks open. In the U.S., when credit rating agency Standard & Poor's lowered its grade on U.S. debt over a weekend in August 2011, fear began spreading like wildfire. Before the markets even began trading on Monday, the S&P 500 Index, a broad measure of stock market activity, was lower by 2 percent, according to the St. Louis Today website. Stocks cumulatively lost $1.2 trillion by the time the stock market closed on that day, according to "The Washington Post."
- USA Today; Should You Avoid a Stock If the Bid-Ask Spread is Large?; Matt Krantz; March 2011
- Nasdaq Exchange: Nasdaq Opening and Closing Crosses
- St. Louis Today; Stocks Open Sharply Lower on S&P Downgrade; August 2011
- The Washington Post; Stock Market Plummets After Historic Downgrade of U.S. Credit Rating; Cezary Podkul; August 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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