A:

Most stock exchanges work according to the forces of supply and demand, which determine the prices at which stocks are bought and sold. What this means is that no trade can occur until one participant is willing to sell the stock at a price at which another is willing to buy it, or until an equilibrium is reached. If there are more buyers than sellers, the stock's price will rise due to increased demand. On the other hand, if more people are selling a stock, its price will decrease.

During a regular trading day, the balance between supply and demand fluctuates as the attractiveness of the stock's price increases and decreases. These fluctuations are also why closing and opening prices are not always identical. In the hours between the closing bell and the following day's opening bell, a number of factors can affect the attractiveness of a particular stock.

For example, good news such as a positive earnings announcement may be issued, increasing a stock's demand and raising the price from the previous day's close. Conversely, bad news can negatively affect price with less demand for the shares. Along with good and bad news, the development of after hours trading (AHT) also has a major effect on the price of the stock between closing and opening bells. AHT used to be restricted to institutional investors and high net worth individuals; however, with the development of electronic communication networks (ECNs) AHT is now available to average investors. With wider spreads and liquidity than what is seen during the day, AHT creates greater volatility in a stock's price.

(For more info on stock trading, read Investing 101: A Tutorial For Beginner Investors.)

RELATED FAQS
  1. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
  2. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  3. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  4. How does a lack of demand affect financial markets?

    Discover how a lack of demand affects financial markets. A lack of demand leads to a new price equilibrium, as prices dramatically ... Read Answer >>
  5. How does the law of supply and demand affect the housing market?

    Learn about the law of supply and demand, the relationship between supply and demand and how the law of supply and demand ... Read Answer >>
  6. Is the law of supply and demand a law or just a hypothesis?

    Learn about the strengths and limitations of supply and demand economic theories, and how they are used to predict and guide ... Read Answer >>
Related Articles
  1. Insights

    What Is Equilibrium?

    Equilibrium is a state of balanced supply and demand.
  2. Insights

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  3. Investing

    Where's The Market Headed Now?

    Whether up, down or sideways, learn about some of the factors that drive stock market moves.
  4. Insights

    4 Factors That Shape Market Trends

    Trends allow traders and investors to capture profits. Find out what's behind them.
  5. Financial Advisor

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  6. Investing

    What Is Economic Equilibrium?

    Economic equilibrium occurs when market supply is equal to market demand.
  7. Insights

    Stock Quotes Explained

    Curious about how stock quotes are compiled and what a trader should know about how? Read on.
  8. Trading

    The Global Electronic Stock Market

    The way trading is conducted is changing rapidly as exchanges turn toward automation.
  9. Investing

    Why You Can't Influence Gas Prices

    Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices.
  10. Trading

    Activities You Can Take Advantage Of In The Pre-Market And After-Hours Trading Sessions

    A great deal can happen in between the New York close of the market and the open the following morning. Learn how you can access opportunities and hedge against risk outside regular trading hours.
RELATED TERMS
  1. Demand

    An economic principle that describes a consumer's desire and ...
  2. Equity Market

    The market in which shares are issued and traded, either through ...
  3. Trading Session

    A period of time consisting of one day of business in a financial ...
  4. Economic Equilibrium

    A condition or state in which economic forces are balanced. These ...
  5. Gap Risk

    The risk that an investment's price will change from one level ...
  6. Equilibrium

    The state in which market supply and demand balance each other ...
Hot Definitions
  1. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  4. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
Trading Center