The difference in stock’s closing price and opening price

By Riya Jain & Abhinash on February 8, 2023

Understanding a stock’s closing price and the opening price at different stages of trading is relevant for many investors. A stock market is a non-linear, unpredictable, and dynamic marketplace providing opportunities to create wealth by trading shares of publicly listed stocks (Alam et al., 2016).

The stock market has offered ample opportunities to many traders to multiply their capital in manifolds. One of the common strategies followed by these traders is to buy stocks at a low price and sell it at a higher price.

The stock price reflects the ability of investor’s perception to earn and have growth in their profits in the future as the prices of stocks change with the demand and supply. When more and more traders are willing to buy a stock, the price of the stock rises. When more people are selling the stock, the prices fall (Vijh et al., 2020).

Investor’s perception of a stock’s closing price and opening price

The closing price is the price at which the market closes for a day while the opening price is the price at which the market starts for a particular trading day. Though the closing price is the previous days closing value but still the opening price for the next day is not always the same as the closing price for the last day (Newsletter & Lucas, 2000; Pagano et al., 2008).

EXAMPLE

If ABC company stock’s closing price for today is Rs 150 then the opening price for the company for tomorrow could be Rs 145.

Closing price acceptance is prevalent among investors due to the method used to calculate the closing price. The last 30 minutes’ performance defines the value of the closing price while the opening price is based on any sudden change. Thus, the stock’s closing price is the preferred measure for many investors.

The opening and closing prices provide information about stock price movements, thus, traders and investors use them for long-term investment decisions. In the stock market, these prices are determined by demand and supply. As the market closes, there are many investors who do after-market trades. Although it is a fraction of the trades, this often results in differences in the opening price. Furthermore, news about a company such as a new acquisition is often released after market hours. Such news also affects the opening price resulting in a difference.

Investors often anticipate the opening price for a stock as it helps in deciding to sell or buy a stock.

EXAMPLE

If an investor is anticipating the launch of a product by a competitor, then this would result in reducing the share price temporarily of a well-known company’s stock. In such a case, investors would wait before buying the stock till the price reaches its lowest.

Closing price vs last traded price

In India, there are two main stock markets i.e. National Securities exchange of India (NSE) and the Bombay stock exchange (BSE). The trading time for the Indian stock exchange is from 9:15 a.m. to 3:30 p.m. wherein the pre-trading session takes place from 9:00 a.m. to 9:15 a.m. while post trading session is from 3:30 p.m. to 4:00 p.m.

Based on the trading hours, the closing price of the stock is defined as the price at which the shares close at the end of trading hours in the stock market. In simple terms, the closing price is the weighted average for all the prices during the last 30 minutes of the trading day i.e. from 3:00 p.m. to 3:00 p.m. (Comerton-forde & Putni, 2007).

Though the closing price is referred to as the last price it is different from the last traded price. In the stock market, the last traded price is the final price at which a stock was traded before the market closure i.e. the price at 3:29:59 p.m. (Adithyan, 2023).

Though the last traded price is the closing value for any stock, sometimes a large buy at the end of the trading day could result in affecting the entire day’s share price. Hence, to avoid this, the value of the closing price is computed separately.

Though the closing price is an effective measure to track the performance of a stock, may not be accurate for many investors as the closing price is based on the last 30 minutes of trade for a day. On the other hand, the opening price depends on the demand and supply of stocks before the market’s opening.

How is the opening price calculated?

The opening price of a stock is determined by collecting orders and batching buy and sell together. Based on batching, the equilibrium quantity and price are determined. The opening price is calculated by the exchange in such a way that most trades are performed with a minimal imbalance in orders. All the eligible traders are provided with a single price while some special sell or buy are given a better price. The remaining orders are placed in the pending order book.

TIP

A limit order contains a set of instructions given to the broker for buying or selling a security at a specified price. Whereas, a market order is to buy or sell a security at the market’s current best price.

The matching of orders is done so that a limit order is matched with the limit order. This is followed by matching with the market order. Lastly, a market order is matched with a market order.

 
First 8 minutes (9:00 a.m. - 9:08 a.m.)

  1. Limit or market orders are collected.
  2. Only CNC orders are placed and not MIS (orders based on leverage).
  3. Cancellations and modifications are allowed.
  4. All big companies, investors, or mutual fund holders enter during this period and influence the market by either raising the price or reducing it.

 
Next 4 minutes (9:08 a.m. - 9:12 a.m.)

  1. Orders are matched using a price identification process i.e. cumulative calculation of total buy, sell, or shares traded is provided.
  2. No more modification, cancellation or addition.
  3. All transactions are assessed and the opening price is decided.

 
Last 3 minutes (9:12 a.m. - 9:15 a.m.)

  1. It is a buffer period wherein transactions are facilitated from the pre-trading session to the trading session.
  2. This is to ensure no problem is present in loading transactions and providing any information to an investor.

Suppose the last trading price for ABC company is Rs 150.

Case 1
Based on the last trading price the transactions during the pre-trading session
Based on the last trading price the transactions during the pre-trading session

As the opening price is decided based on the maximum tradable quantity value i.e. 8000, thus, the opening price would be Rs 155.

Case 2
When the maximum tradable quantity for 2 prices is the same
When the maximum tradable quantity for 2 stock prices is the same

Herein, for share prices 155 and 146, the maximum tradable quantity is 8000, thus, herein the opening price would be decided based on low unmatched orders i.e. -500 < -2000 thus, the opening price would be Rs 146.

Case 3
When the unmatched order too is the same along with the maximum tradable quantity

In the above case, the maximum tradable quantity is 800 and the unmatched value is also 500 for share prices 155 and 146, thus, herein, the opening price would be 146 as the nearest value to the last traded price i.e. 150 is 146 only i.e. (150-146 = 4 while 155-150 = 5).

Case 4
When the maximum tradable quantity, unmatched orders, and difference between the last traded price and the price are also the same
When the maximum tradable quantity, unmatched orders, and difference between the last traded price and the price are also the same

In the above table, the maximum tradable quantity is 8000, unmatched orders are 500, and the difference between the last traded price and the new price is 4 only, then the opening price for the day would be the same as the last traded price i.e. 150.

How is the stock’s closing price computed?

A stock’s closing price is the average price of the last 30 minutes of the trading day, thus, it could be computed by dividing the sum of the total product of the number of shares traded at a particular price during a particular time in the last 30 minutes by the total number of shares traded in last 30 minutes.

Stock's closing price computation
Stock’s closing price computation
EXAMPLE

If at 3:10 p.m. 10, shares are traded at Rs 10 each, 5 shares at 3:20 p.m. at Rs 12 each, and 2 shares at 3:29 p.m. at Rs 13 each. Then the stock’s closing price would be:

Stock's closing price computation

References

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