Opening and closing prices are often regarded as the two most important price points within a given trading session. As a result, these data points are followed closely by market participants and analysts alike.
Also known as the “open” and “close,” these price levels provide significant reference points to gauge strength & identify important price levels to help confirm trading ideas or biases.
Although a session’s high and low may be above or below the opening & closing prices, these often carry less weight than the actual open and close. Intraday price fluctuations are often thought of as “noise” and many traders rely more heavily upon a security’s closing price than the intraday high or low. In fact, prior to electronic trading, the closing price was the only price listed in the newspaper.
What is Closing Price ?
Closing price” generally refers to the last price at which a stock trades during a regular trading session. For many our Indian market , regular trading sessions run from 9:15 a.m. to 3:30 p.m.
A number of markets offer after-hours trading and some financial publications and market data vendors use the last trade in these after-hours markets as the closing price for the day. Others use the 3:30 p.m. price as the closing price and display prices for after-hours trading separately.
To avoid confusion, the central distributor of transaction prices for exchange-traded securities – the Consolidated Tape Association – implemented a system designed to make closing prices uniform. Under this system, the regular session closing price for stocks is the 3:30 p.m. price. Any trades that take place during after-hours trading sessions are “tagged” with the letter “T” on the consolidated tape and will not affect the regular session closing price or the regular session high and low prices. The Indian Stock Market uses similar conventions.
However, the closing price for the same stock may continue to be reported differently by various media and market data vendors. This discrepancy in how the media and others report closing prices can cause confusion – especially when a single, low-volume after-hours trade occurs at a price that is substantially different from the 3:30 p.m. closing price. For example, the closing price listed on a company’s website could be different from the price shown on the consolidated tape flashing across the bottom of a television screen. Or, the next day, the investor might hear that the stock opened “up” even though it opened “down” compared with the price at the 3:30 p.m. close.
Investors who check closing prices may want to consider the following:
Is the closing price based on the regular trading session price established on the security’s primary market?
Does the closing price reflect the last trade reported over the consolidated tape as of the close of the regular trading session at 3:30 pm.
Does the closing price reflect the last trade reported over the consolidated tape in after-hours trading?
The closing price is the raw price or cash value of the last transacted price in a security before the market officially closes for normal trading. It is often the reference point used by investors to compare a stock’s performance since the previous day—and closing prices are frequently used to construct line graphs depicting historical price changes over time.
The adjusted closing price factors in anything that might affect the stock price after the market closes, such as dividends or splits. Most stocks and other financial instruments are traded after-hours, although in far smaller volumes. Therefore, the closing price of any security is often different from its after-hours trading price.
Why closing price is important in stock market ?
The stock market close price level provides very important information about the general mood of investors. It tells a lot about the thinking of big investors that allocate large amount of money into the stock market for their asset management purposes.
It is known that big investors use the last few trading hours for their positioning. I am not sure if it is mentioned in materials during typical training but big price moves happen by movement of big asset allocators – like big mutual funds, big insurance companies, hedge funds, etc. And it is known that they prefer to arrange their decision in afternoon trading just before the stock market close. They want to increase buying or selling during the last couple hours of trading.
We as smaller traders want to know what these big investors do. And it can be seen by monitoring stock market close prices. You can check close price of any major index if you want to know the broader intentions of global investors.
And it is possible to monitor just the closing prices for any particular stock or sector to analyze behavior of investors in reference to this individual share ticker.
What stock market closing prices tell us
Is there heavy buying into the market close? Are investors bidding prices all the way up to the stock market close? This is a sign of very bullish investor opinion about these particular shares. It could be quite safe to buy these shares too. Especially if you have already prepared some online trade setups in advance and are already monitoring share price movements during the day.
The day traders use such bullish close of the market to allow some holding of their position to the next day. The typical expectation is that shares with strong buying interest into market close could be trading much higher the next day immediately from the open. Some of these day traders or short-term traders would also use premarket trading hours to close trade and make profit based on such expectations.
The opposite is true for stocks or sectors where a weakness emerges in the last two hours before market close. These shares prove to be sold by big money managers. This can be good if we plan to have some short sell trade with these shares. But it should be a warning sign if we hold long (bullish) positions in such a symbol.
Closing prices for exchange traded funds
Exchange traded funds are different equities that are traded on US exchanges. Although they are also traded and their prices move with buying and selling, the calculation of fair price for any exchange traded fund is little bit different. These ETFs typically represent some basket of stocks that they hold in a portfolio.
So the fair price of an exchange traded fund is calculated intraday and also on closing basis. This fair price is based on prices of stocks in the ETF portfolio. The value of such exchange traded fund is known as NAV (Net asset value). It can be a little different during a trading day. But final closing price should not be very far from calculated NAV.
But you can find some exchange traded funds where you can find quite a significant difference between stock market close price and final NAV for the trading day. These exchange traded funds are mostly very illiquid and very thinly traded.
Use Closing Price to Confirm or Deny Trends
The closing price can be an important factor when determining the strength of a trend. Within an intraday trend, for example, a new intraday high is much less significant than a record high close. On the other hand, an intraday low is less important if the price recovers before the close.
For multiple day or weekly trends, gauging the closing price in reference to surrounding bars can help to determine trend strength or predict reversals.