Why Don’t Stocks Begin Trading at the Previous Day’s Closing Price?

In stock exchanges, stock prices are fluid and constantly changing. The price quoted for a stock at any time of day is simply the price paid the last time that stock was traded. Stock exchanges correspond to buyers and sellers, but the forces of supply and demand determine the prices at which stocks are bought and sold.

According to the forces of supply and demand, no trade can take place until one participant is willing to sell the stock at a price (the ask price) at which another is willing to buy it. (the bid price). This point, where a buyer and a seller agree on a price, is called a balance. If there are more people who want to buy a stock than people who are ready to sell it – there are more buyers than sellers – the price of the stock will rise due to increased demand . On the other hand, if more people sell a given stock than buy, its price will decrease.

Key points to remember

  • Stock prices are fluid and constantly changing; the price quoted for a stock at any time of day is simply the price that was paid the last time the stock was traded.
  • Information about a company may be released while the market is closed, changing what investors are willing to pay to own a share of the company and changing the company’s stock price without any transactions occurring. occur.
  • The development of after-hours trading (AHT) has had a major effect on stock prices between the closing and opening bells, as it means that transactions take place and change stock prices even after hours. Office.

The closing price shown is the last price someone paid for a share of that stock during business hours on the exchange where the stock trades. The opening price is the price of the first transaction of a business day. Sometimes these prices are different. During a normal trading day, the balance between supply and demand fluctuates as the attractiveness of the stock price rises and falls. These fluctuations explain why the closure and opening price are not always identical. In the hours between closing bell and the next trading day opening bella number of factors can affect the attractiveness of a particular stock.

Company announcements can alter investor sentiment

News about a company often comes out when the market is closed, which can change what investors are willing to pay to own a share of the company. In fact, many companies wait until markets close before making any major announcements. For example, a positive announcement of results may be issued, increasing demand for a stock and raising the price from the previous day’s close. Conversely, bad news can negatively affect the price by creating less demand for the stock. Without any trades taking place, investor sentiment can change the price of a stock.

After-hours trading changes stock prices

Along with the actuality of a company, the development of after hours trading (AHT) had a major effect on the stock price between the closing bell and the opening bell. AHT means that transactions take place and change stock prices even after business hours. AHT was previously restricted to institutional investors and high net worth individuals; however, with the development of electronic communications networks (ECN), AHT is now available for average investors. With wider spreads and less liquidity than what is seen during the day, AHT creates greater volatility in the course of a share.

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