What are Opening Prices different from the previous Closing Price?
When I placed my first overnight order to buy a stock at market price the next day, I was surprised to see that it ended up costing me more than I expected: The stock had “gapped up” and the price I paid was above what I expected.
I couldn’t understand why the price at the end of the day yesterday didn’t match the opening. If the market was closed, I thought, how can the price change?
In simple terms, if the price is up at opening, there were more buyers than sellers. But, if the market has been closed, how have these buyers bought and moved the price?
It seems the market can jump overnight for any number of reasons—including overnight market activity (after-hours trading) or news about a specific stock—and there is actually no obligation on the part of market makers to open the stock at the price it was trading the day before.
After-hours trading is the buying and selling of securities outside of specified regular trading hours (i.e. 9:30 am to 4:00 pm EST). After-hours trading is from 4:00 to 8:00 pm EST and Pre-market trading occurs from 7:00 to 9:30 am EST.
This was made possible by the introduction of “electronic communications networks” (ECNs) in the 1990s.
In theory, any investor can make arrangements to access an ECN to trade in the after-hours marketplace. But, in practice, it is mainly used by major institutional players and high-net worth individuals who can handle the severe price volatility and thin volume. This trading though does have a role in moving overnight stock prices up and down.
On the other hand, overnight price changes affected by news about a specific stock are caused by people like me who place overnight orders. My order went into the pile with all the other overnight orders accumulating with brokers, even though the market is technically closed to business. Then it sat there waiting for the new day.
My thought was that, just as the market opened in the morning, all of the orders would be filled in sequence in the order they were received. However, according to How Stuff Works, because this wouldn’t be fair to investors who can normally (i.e during market hours) watch how prices are reacting, (the NASDAQ Stock Exchange at least) uses a computer to calculate a “best price” and then, after allowing dealers to place orders to offsetting any imbalances (e.g. more sell orders than buy orders), it sets the opening.
So, there you go, you can’t predict a stock’s opening price – unless you can predict the news (and after-market trading). You just have to accept it.
Beware though, if you set a stop “good until cancelled” and the stock hits that price during after-hours trading, it seems most brokers will not execute the order during after-hours trading. The stop will only be execute the next day if the price is still below your trigger point.