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. Why do stock prices change following news reports?

    Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular ... Read Answer >>
  2. How Does the Law of Supply and Demand Affect Prices?

    Learn what the law of supply and demand is. Read Answer >>
  3. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Answer >>
  4. 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 >>
  5. 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 >>
  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

    What Is Economic Equilibrium?

    Economic equilibrium occurs when market supply is equal to market demand.
  4. Investing

    Where's The Market Headed Now?

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

    Best Time(s) of Day, Week & Month to Trade Stocks

    Is 9:00am or Noon better to buy stock? Best day? What about best month? Here's how time affects trading decisions based on daily, weekly and monthly trends
  6. 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.
  7. Insights

    4 Factors That Shape Market Trends

    Trends allow traders and investors to capture profits. Find out what's behind them.
  8. Trading

    The Global Electronic Stock Market

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

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  10. Insights

    Stock Quotes Explained

    Curious about how stock quotes are compiled and what a trader should know about how? Read on.
RELATED TERMS
  1. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource ...
  2. Demand

    An economic principle that describes a consumer's desire and ...
  3. After The Bell

    A phrase used to describe news, earnings reports and other activities ...
  4. Trading Session

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

    A condition or state in which economic forces are balanced. These ...
  6. Equilibrium

    The state in which market supply and demand balance each other ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  5. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  6. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
Trading Center