The difference between the opening price and the closing price
There is often a difference between the closing price of a stock one day and the opening price the next. This is due to the news about a company that can appear during the market close, which leads to the conversion of what investors are willing to pay to own a stake in the company. The markets also allow limited trading after and before business hours, which means that transactions occur and prices change even after hours.
How do stock prices work?
Before looking for the difference between the difference between the opening price and the closing price, you first need to understand how stock prices work. At the grocery store, the prices are set right there on the shelf, so if a peach costs 69 cents a box, that’s what you’ll pay for it.
But prices are volatile in the stock market, and the price offered for a share at any time is simply the price paid the last time it was traded, and there is no guarantee that you will get this price if you place an order to buy or sell shares.
What is the closing price?
The closing price listed is the last price anyone will pay for a share of that stock during the business hours of the exchange where the shares are traded. The major US stock exchanges are generally open from 9:30 am to 4 pm EST.
Although the closing price is just a snapshot of a stock at 4pm, it carries a lot of psychological weight, as it is often interpreted as the market’s “last word” on a stock for the day. But it’s really no different than the price at any other time of the day, whether it’s 10 am, noon, 2 pm, or any other time, because the exchange doesn’t put a sticker on a shelf that locks the price in until the next morning at 9:30.
Trading in stocks continues even after the stock exchanges are closed. Investors can place buy and sell orders even “after business hours.” These orders are executed immediately or placed in a queue to be executed when the market opens.
Meanwhile, investors watch news and events that may affect stock prices. There are many companies that wait until after the markets close to make major announcements. If they announce good news such as a good earnings season, people will be willing to pay more for the stock in the morning, whereas if they announce bad news, prices will often drop.
Opening price valuation
Just as the closing price is the price paid in the last business day transaction, the opening price is the price from the first business day transaction. This price can be affected by anything that happened since the previous close.
Imagine a company whose stock closes one day at $20 a share. That night, news broke that the company had committed a massive accounting fraud and was in dire financial straits. When the market opens the next day, no one will pay $20 a share, because it’s not worth it, and the most anyone is willing to pay would be $2 a share, so the stock will open at $2.
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