DEFINITION of Overnight Return
Overnight return measures the return generated by a stock when the market is closed, based on its price change from the close of one trading day to the opening of the next trading day. It is one of the two components of the total daily return generated by a stock. Intraday return is the second component of the total daily return. Overnight return and intraday return together constitute the total daily return from a stock, which is based on the price change of a stock from the close of one trading day to the close of the next trading day.
BREAKING DOWN Overnight Return
The overnight return component of total return is significant because most companies report their financial results when markets are closed, in order to enable all investors to receive the information at the same time. Most companies also make major announcements after market hours, rather than in the middle of the trading day. As a result, the opening price of a stock is often likely to be materially different from its previous day's close.
In addition, as global financial markets display a higher degree of correlation thanks to globalization and the efficient dissemination of information, stocks are now increasingly likely to be affected by developments in overseas markets, which would also boost the importance of overnight returns.
Example of Overnight Return
XYZ Stock closed Monday's trading at $10.00/share. When the market opened on Tuesday, XYZ Stock opened at a price of $12.00 share. The overnight return for XYZ stock is 20%, which represents the difference of $2/share between the closing price on Monday and the opening price on Tuesday.