Stock Opening and Closing Prices Of The Market: Why Does It Matter?
If you’ve followed financial markets for any time at all, you’ll have heard analysts and news articles discussing how financial markets were at a certain price at markets’ opening, and another price after closing. But why does it matter? And can it help your trading?
What is a market open price? And a market closing price?
Each part of the world has different trading hours, determined by the business hours of that region’s primary stock exchange’s business hours, and the hours of the day when its traders are more actively trading.
The exact spot price your market is at when its trading session opens on the exchange for the day (not to be confused with the time the exchange itself opens) is its opening price. If you’re trading on single stocks, the open is often calculated via an auction process, typically using the lowest ask & highest bid price during this period.
For example, if you’re speculating on a U.S. share price listed on the New York Stock Exchange (NYSE), then its spot price at the moment that it begins trading, rather than the moment the NY trading session itself opens, is the stock’s opening price.
The same is true for the closing prices - the exact value that your chosen market is priced at when the exchange it's listed on closes for the trading day is its closing price.
Why don’t markets like stocks open at the same price?
It’s easy to assume that the different trading sessions at the end of the day represent a ‘pause’ on the market, only for everyone to pick up where they left off the day before, with that stock/underlying asset opening at the exact same price they closed at yesterday. But the truth is that the markets never sleep.
Because of a number of reasons, that price will still be speculated on after hours. Some traders who aren’t based in the same timezone as their chosen market’s listed exchange may trade on another listing of the same market on their local exchange during their session. Plus, other traders will speculate on it after hours if they are able to - or schedule automated trades for this time if unable to.
All of these factors will drive the price up and down moment by moment - more bullish, positive sentiment on the underlying asset will drive its price up, while more pessimistic market sentiment will drive the price down. Whatever that different price is at when the market reopens for the next trading day, that’s its new opening price. And, depending on the level of activity in those hours between your market’s previous close and its new opening, the price level could be very different.
The significance of different opening and closing prices
These price differences have significant implications for market depth and liquidity, as they can be an indicator of how volatile and/or liquid that market is. Disruptions like big news, a change in market sentiment or a significant change overnight in the amount of buyers and sellers for that market can alter a market’s bid and ask prices dramatically. That’s a strong indicator of high volatility (and maybe also illiquidity) in that market at that time. This can manifest as an opening price that is wildly different from the previous day’s closing price, or when a market closes much higher or lower to the price it opened at.
In a similar way to how market experts emphasise the intraday highs and lows, they’ll note their opening and closing prices, because more movement and divergence between these two prices means that more disruption is happening, more speculation and more activity - all driving the pricing up and down. And these swings in price represent opportunities for traders to make either a profit or a loss by speculating on those movements.
Factors that determine markets’ opening and closing prices
There are various factors that determine how much a market’s closing and opening prices may vary, and they’ll differ depending on the market in question. These include major corporate developments for stocks, industry-wide headwinds or tailwinds when it comes to indices, and macroeconomic shifts like changes in interest rates or inflation when it comes to commodities.
Obviously, the bigger and more unexpected the catalyst was, the more significant the difference of markets’ opening and closing prices will be. Here’s a non-exhaustive list of some of these potential factors:
- The level of liquidity in any market is the foremost thing that will change its price. If there’s a significant increase or decrease in the volume of traders speculating on a market intraday or with after-hours trading, that will often cause big differences in its closing and opening price
- Highly-publicised news will also affect prices. Shocking articles of a geopolitical nature will affect macro markets the most (like for example indices) while headlines related to a particular country will affect forex pairs involving its currency. Scandals involving a company or its leadership, meanwhile, will affect its share price
- Stock splits, mergers or acquisitions will have significant effects on both stock prices involved
- During earnings season, the release of a company’s financial results will affect their stock price and so might affect the announcement of a rival company’s financial results. If the financial results are released outside of normal trading hours (for example some companies release their results after close of business in the evening), then that will especially create discrepancy between closing and opening prices
- Changes in inflation and/or interest rates will impact every market, to varying degrees - most notable forex currency pairs, indices and commodities
- Significant changes in commodities’ prices themselves (especially unexpected ones), for example from geopolitical events like wars, will also in turn affect inflation usually. This will then have a trickle-down effect to all other markets’ closing and opening prices as well on the day/s that this change occurs
What different opening and closing prices mean for you
As we’ve said above, more market movement means more of a potential opportunity to trade on those price movements. Greater volatility and price movement means that there is a chance to make more of a profit if you forecast these moves correctly - however there is also the possibility to suffer a loss if you predict incorrectly.
Since a bigger difference between the opening and closing prices of a market intraday is a good indicator of how much your market is moving, it can be a good idea to keep an eye on these opening and closing prices regularly.
Traders can also keep track of closing and opening price data and use it to make trading decisions. For example, they might analyse several days, weeks or even months’ worth of trading day opening and closing prices and use that information to understand market sentiment, draw trend lines, plot support and resistance levels and gauge the strength of current potential trends in that market.
Let’s look at an example of how you can utilise a difference between opening and closing prices to your advantage. Imagine you’re a stock trader interested in speculating on a specific company’s share price, by using share CFDs with Pepperstone.
It’s earnings season, and you know they are releasing their results this evening AMC (after market close). You have reason to believe, after looking at the data, that the company will most likely post good and solid financial results that’ll be positively received by its shareholders. This may cause a number of after-hours trades, causing upward shifts in price of eight points or more, that you know will be realised once markets open the next morning.
So, you might schedule two share CFD orders to take advantage of this. First, you place a ‘buy’ position for after the markets close (or first thing after the market opens the next day (if out-of-hours trading isn’t possible on that stock) to capitalise on the market sentiment and its positive momentum that you think will drive the share price upwards. Then, you may place a ‘sell’ order to close your position the next day, as well as perhaps opening scalping positions in order to take advantage of the short-term volatility caused by the difference in the stock’s closing and opening prices. If this strategy pays off, you can make a significant profit. Alternatively, if you’ve predicted incorrectly, you’d suffer a loss.
In conclusion: the TL;DR summary
- A market’s opening price is its underlying asset’s pricing at the exact moment the trading session begins in the region and exchange where that market is based. Likewise, its closing price is the valuation of that underlying asset at the moment that same trading session and exchange closes up for that trading day.
- The disparity and amount of movement between a market’s opening price and closing price is a gauge of the level of volatility, momentum and liquidity in that market.
- This is significant, because the more your market moves (and the more active traders or investors are involved in this movement), the higher the chance you have of making a profit (but also potentially a loss) off of its price swings. So, by keeping an eye on your opening and closing prices, you can have an idea as to your market’s market sentiment, volatility and how liquid it is.
- Keeping track of your market’s opening price and closing price over a space of time can also give you significant data insights into that underlying asset. You can use this data to analyse its chart in terms of trends, support and resistance levels, market sentiment and the strength or momentum of its trends.
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