Does After-Hours Trading Affect Opening Price?

Nowadays, the stock market never sleeps.

Nowadays, the stock market never sleeps.

The major U.S. stock exchanges are open for only 6 1/2 hours a day, five days a week. But plenty of investors seem willing to stare at their computer screens and scream with joy or rage 24/7. For them, there's after-hours trading. Trading that takes place after hours can definitely affect the opening price of a stock, but there's no guarantee it will.

Dynamic Prices

Stock prices are always in motion. When you type in a company's stock-ticker symbol on a financial website, the share price that pops up is not technically the current price of the company's stock. It's the price agreed to in the most recently completed transaction involving the stock. Every stock sale is a negotiation: The seller says how much she wants for a stock, and the buyer says how much he's willing to pay. Stock exchanges match them up. Even if the latest sale happened seconds ago, it's in the past. Between then and now, who knows. Everyone's phone could have buzzed with news that the CEO has gone bananas and looted the company, sending the price plummeting.

Closing and Opening

The fact that stock quotes reflect "past" prices rather than current ones helps explain why a stock's closing price one day is often different from the opening price the next day. The closing price is simply the price on the last trade that went through before the exchange closed for the day, usually a 4 p.m. EST. The opening price is the price of the first trade that goes through after the exchange opens at 9:30 a.m. EST. A lot can happen between closing and opening, and that includes after-hours trading.

After Hours

It used to be that the only people who could trade after hours were the super-rich and big institutional investors. Nowadays, anyone with Internet access can do it. As a result, trading in a stock can keep going even after the stock has "closed." The same things that move stock prices during regular hours also move them after hours -- supply and demand. If big news about a company breaks, that will affect the price in after-hours trading, and the price will rise or fall depending on the news. When the stock opens in the morning, traders will be taking into account the news, as well as the after-hours reaction to it, and that may affect the opening price.

Volume Issues

There are significantly fewer people trading after hours than during the regular day. Lower trading volume tends to make stock prices more volatile, or more likely to jump up or down rather than move smoothly. That's because a single big buy or sell order can have a major impact on the demand or supply of a particular security. When the rest of the world starts trading after the opening bell, that kind of extra supply or demand might be easily absorbed. That means the opening price may be radically different from what the stock was trading for after hours. Just as there's no assurance that one day's closing price will be the next day's opening price, there's also no assurance that the after-hours price will carry over into the regular session.

 

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