Stock prices might seem to move up and down for no good reason. This is especially true when a stock opens the market day at a significantly different price than where it closed the day before. The truth is, the opening price of stock is based upon supply and demand, and it may also be affected by how the exchange handles pre-market orders.
The opening price for stock is not always the same price as the closing price from the day before. Supply and demand drives the stock market, and events can occur between the closing bell and the next morning's opening that can affect the price of stock, including news releases and buy/sell orders placed during that time.
Stock Market Hours
The U.S. stock exchanges -- NYSE and Nasdaq -- are officially open for trading 9:30 a.m. to 4 p.m., Eastern time, Monday through Friday. During market hours, stocks prices change based on the supply -- sell orders -- and demand -- buy orders -- being sent to the market. The price of a stock moves up and down to balance the orders, but the movement is continuous as traders submit new orders as the prices change.
Stock exchange rules prohibit companies from releasing important news items and disrupting trading while the exchanges are open. You will notice that your stocks' companies issue press releases either after the market closes in the afternoon or before the market opens in the morning. Of primary importance to investors are the quarterly earnings reports companies must file. The four earnings releases per year can be the only times a company provides in-depth information about financial results.
News Changes Expectations
Between the quarterly earnings report dates, Wall Street analysts put out their estimates of company sales and earnings per share for the next quarterly release. When the actual results are published, investors and traders look to see whether the company hit, missed or beat analysts' expectations. A miss or a beat can quickly change the expectations concerning a stock's value, and buy or sell orders reflecting the changed expectations often pile up ahead of the next opening bell.
Stock Exchange Actions
Before the stock market opens, the exchanges look at the buy and sell orders that have been entered to be filled when the market opens. On the New York Stock Exchange, the specialist in a stock will pick an opening price that he believes will balance out the initial buyers and sellers.
The Nasdaq uses what it calls the opening cross computer price matching system to set the stock price when the market opens. If a lot has happened in the news relevant to the stock since the previous close, the opening price might be quite different from the last day's closing price.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.