Posted in Finance, Accounting and Economics Terms, Total Reads: 201
Definition: Opening Price
Opening price is the price at which any stock or any other security trades first time as soon as the exchange opens on each day. Opening price of each stock is different on different days depending upon the market news related to that stock and also on the demand. If on any particular trading day a stock experiences high volatility either through excessive buying or selling, then there is a significant change in the market price of that stock. This change for a particular day is also measured relative to opening price for the day.
Opening price of the stock for the current day and its closing price a day before differs. This is because even though the domestic market may close down but markets in some other countries remain open according to their different time zones, so foreign investors and even domestic investors keep placing their orders overnight. In this case although the real time trading does not take place but various orders are accumulated overnight. Based on these accumulated orders, different exchanges follow different procedures to obtain opening price for each day.
For example: NASDAQ uses an approach known as ‘Opening Cross’. In this approach, the program selects the most suitable price to be used as opening price on the exchange on the basis of accumulated overnight orders. But it may happen that any good news or bad news related to any particular stock hits the market after closing of trade on that particular day. Then, in that case either there may be excessive buy or sell orders for that stock. This creates trade imbalance. Through opening cross approach, NASDAQ takes this also into consideration by sending this information to its dealers so that they can place orders to counter trade balance before opening of the exchange. On SENSEX, opening price is decided on the basis of quantity of trade that happened on that particular price and also on the basis of minimum trade imbalance.