The closing price of a stock one day and its open price the next day are often different. That's because news about a company can, and often does, come out while the market is closed, shifting what investors are willing to pay to own a share of the company. Markets also allow limited after-hours and before-hours trading, which means transactions are happening and shifting prices even after hours.
Previous close by definition in stock market language refers to essentially the last trading price of the previous day, while open price refers to the first trading price of the day. Investors can change their minds based on new information about what a stock is worth while it's closed, meaning prices can shift without any trades taking place.
How a Stock Price Works
At the grocery store, prices are marked right there on the shelf. If peaches are 69 cents a can, then that's what you'll pay for them.
But in the stock market, prices are fluid. The price quoted for a stock at any point is simply the price paid the last time that stock changed hands. There's no guarantee that you'll get that price if you place an order to buy or sell shares. Stock exchanges match buyers and sellers, and prices are set through the interplay of what buyers are willing to pay and what sellers are willing to accept.
Technically, there are bid prices, meaning what people are offering for the stock, and ask prices, meaning what people are looking to be paid for it. When those prices converge, trades take place.
Exploring the Closing Price
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 major U.S. exchanges are generally open from 9:30 a.m. to 4 p.m. Eastern time. The closing price is just a snapshot of the stock at 4 p.m.
This price does carry a lot of psychological weight, as it's often interpreted as the market's "final say" on a stock for the day. But it's really no different than a price from any other time of day, be it 10 a.m., noon, 2 p.m. or whenever. The exchange doesn't put a label on a shelf that locks in the price until the following morning at 9:30.
After-Hours Events in Markets
Trading in stocks continues even after exchanges close. Investors can place "after-hours" buy and sell orders. Depending on the system, these orders either are filled immediately or are queued up to be filled when the market opens. Those trades will affect the next day's opening price.
Meanwhile, investors are watching for news and events that could affect stock prices. Many companies, for example, wait until after the markets close to make major announcements. If they announce good news, like a good season of earnings, people will be willing to pay more for the stock in the morning, while if they announce bad news, prices will often come down.
Assessing the Open Price
Just as the closing price is the price paid in the last transaction of a business day, the opening price is the price from the first transaction of a business day. That price can be influenced by anything that has happened since the previous close.
Imagine a company whose stock closes one day at $20 a share. That night, news breaks that the company has perpetrated a massive accounting fraud and is in dire financial shape. When the market opens the next day, no one is going to pay $20 a share for the stock, because it's not worth that. If the most anyone is willing to pay is $2 a share, then the stock will open at $2.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.