What Is the Closing Price?
Even in the era of 24-hour trading, there is a closing price for any stock or other security, and it is the final price at which it trades during regular market hours on any given day. The closing price is considered the most accurate valuation of a stock or other security until trading resumes on the next trading day.
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 price.
Understanding the Closing Price
Closing prices are useful markers for investors to use to assess changes in stock prices over time.
- A stock's closing price is the standard benchmark used by investors to track its performance over time.
- The closing price is the last price at which the stock traded during the regular trading day.
- After-hours trading prices can be deceptive as volume is relatively light.
The closing price on one day can be compared to the closing price on the previous day, or 30 days earlier, or a year earlier, to measure the changes in market sentiment towards that stock. All stock news sites allow investors to chart closing prices for a period of years, and typically since the day the company went public.
Pitfalls of the Closing Price
One important fact is that the closing price of any company's stock will not usually reflect any news released by the company that day. Major company announcements related to earnings, stock splits, reverse stock splits, and stock dividends are typically released after the close of the regular trading day in order to give traders a chance to digest the news before acting upon it.
The release of news generally causes a stock's price to move dramatically up or down in after-hours trading. However, after-hours trading involves a fraction of the volume seen during the trading day, making these price swings potentially deceptive.
Closing Price Vs. Adjusted Closing Price
A particularly dramatic change in price occurs when a company announces a stock split. When the change is made, the price displayed will immediately reflect the split. For example, if a company splits its stock 2-for-1, the last closing price will be cut in half. That's the adjusted closing price.
If a stock's price moves dramatically after hours, check the financial news!
A reverse stock split causes a similarly dramatic price change. A reverse stock split can be a sign of a company in trouble that is struggling to make its stock price look healthier, or at least keep it above the $1 threshold that can get it delisted from an exchange. A 1-for-10 reverse stock split, for example, can transform a stock that is trading at 18 cents a share into one that is trading at $1.80 a share.
It can also seriously confuse an investor comparing closing prices over two days.
In fact, if a stock's price moves radically after hours, a wise investor checks the financial news.