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

In the stock exchanges, the prices of stocks are fluid and constantly changing. The price quoted for a stock at any point throughout the day is simply the price that paid the last time that stock was traded. Stock exchanges match 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 occur 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 seller agree on a price, is called an equilibrium. If there are more people who want to buy a stock than people who are willing to sell the stock–there are more buyers than sellers–the stock’s price will rise due to increased demand. On the other hand, if more people are selling a given stock than are buying it, its price will decrease.

Key Takeaways

• Stock prices are fluid and constantly changing
• Any price quoted is the price paid from the last stock trade
• Companies can release news after the market is closed and shift investors’ sentiment
• Shifting investor sentiment can change a stock’s price without trades occurring
• After-hours trading (AHT) impacts the stock price between the closing and opening bells

The listed closing price is the last price anyone paid for a share of that stock during the business hours of the exchange where the stock trades. The opening price is the price from the first transaction of a business day. Sometimes these prices are different. During a regular trading day, the balance between supply and demand fluctuates as the attractiveness of the stock’s price increases and decreases. These fluctuations are why closing and opening prices are not always identical. In the hours between the closing bell and the following trading day’s opening bell, a number of factors can affect the attractiveness of a particular stock.

Company Announcements Can Alter Investor Sentiment

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

After-Hours Trading Shifts Prices of Stocks

Along with news about a company, the development of after-hours trading (AHT) has had a major effect on the price of the stock between the closing and opening bells. AHT means that transactions are happening and shifting the prices of stocks even after-hours. AHT used to be restricted to institutional investors and high-net-worth individuals; however, with the development of electronic communication networks (ECNs), AHT is now available to average investors. With wider spreads and less liquidity than what is seen during the day, AHT creates greater volatility in a stock’s price.

Read the original article on Investopedia.