The Open Price of a security is the price at which it begins trading on any given day, and it is determined through a Call auction mechanism. Traders first submit their orders, which are then matched to decide the opening value of the security. This process takes place during a pre-opening session from 09:00 AM to 09:15 AM on the Stock Exchange, and it is designed to efficiently realize prices without causing excessive volatility. The supply and demand of securities ultimately determine their opening prices. However, if a unique price cannot be discovered during the pre-opening session, the Open Price becomes the first price at which the security trades during the normal session. The trading activity of individual stocks also determines the opening prices of indexes such as SENSEX and NIFTY. It’s worth noting that the price at which trading starts on a given day could differ from the previous day’s Closing Price due to multiple reasons.
In general, terms, to calculate the Open Price of stocks on the Indian stock market, the following steps are done on the Stock Exchange:
| Step | Description |
|---|---|
| Step 0 | Orders are placed in the pre-opening session, which runs from 9:00 AM to 9:15 AM |
| Step 1 | After receiving the orders, the buy and sell orders are batched together to find the cumulative orders |
| Step 2 | An equilibrium price and quantity are decided after batching, which is called the theoretical price |
| Step 3 | A price discovery process is initiated to find the open price that results in the maximum quantity of shares traded while minimizing the order imbalances |
| Step 4 | Eligible trades are executed on this single open share price, which is the final Open Price |
| Step 5 | Orders that were not executed are put in the pending Order Book for the normal trading session, which starts immediately after the pre-opening session |
It’s worth noting that the trading activity in individual stocks will directly influence the opening of the benchmark indices, such as the SENSEX and NIFTY. The price at which trading starts in a day could be different from the previous day’s Closing Price of the stock, and there can be multiple reasons for a large change in these two prices. Additionally, some Buy orders and Sell orders may get executed at a better price, which is known as price improvement. If an investor places a buy order at INR 100, but the stock opens at INR 99, then the order will get executed at INR 99 in the pre-opening session. Similar price improvement can also be seen for sell orders.
Uses of the Opening Price
Here are some common applications where this price is used:
- To analyze the market sentiment and volatility: A large difference between the opening price and the previous day’s closing price can indicate high volatility or a change in the market sentiment.
- To compare the performance of a stock with the market index: If a stock opens higher than the market index, it can indicate better performance, while a lower opening can suggest underperformance.
- To determine the price at which a stock’s performance is measured for the day: For example, if an investor wants to track the daily performance of a stock, they can use the opening price as a reference point.
- To identify potential trading opportunities: Traders can use the opening price as a reference point for setting stop-loss and take-profit levels or identifying potential support and resistance levels.
Why Open Price is different from the Previous Close Price?
The Open Price of a stock when the market opens may often differ from the Closing Price from the previous day. This is a common observation for regular traders and investors. For instance, if a stock’s closing price today is INR 100, it does not necessarily mean that the stock will open tomorrow at the same price. The primary reason for this difference lies in the method used to calculate these prices. Additionally, external factors can also contribute to the price mismatch.
The Close Price refers to the price at which the last trade happened on any given day, while the Closing Price of a stock is calculated by taking the weighted average of the stock prices in the last 30 minutes. On the other hand, the Open Price is determined through a call auction mechanism (Pre-Open). The supply and demand at the start of the day can move the prices in either direction, leading to a potential mismatch between the Closing Price and the Open Price.
External Factors which impact Opening Price of Instrument-
External factors that impact the opening price of an instrument are:
- Sudden price movement before market close
The closing price is a volume-weighted average price (VWAP) of the last 30 minutes of trading time. If there are no other factors involved, the trading on the next day should resume from the last traded price (LTP) and not the closing price. This is because the closing price could be significantly different from the LTP.
Example: If the LTP of a stock is INR 150, but the closing price is INR 140, the opening price on the next day may be closer to INR 150. - Block deal window
Block deal refers to a large trade that happens on a single order. In the stock markets, there are two windows available in the day when these trades can be done. The morning window takes place from 08:45 AM to 09:00 AM, before the markets open.
In the block deal window, the reference price used for the deals is the previous day’s closing price. The deals are allowed at a price within +/- 1% of the previous closing. Therefore, since these deals take place before the market opens, the opening price can easily move by 1% in either direction from the previous closing price.
Example: If the previous closing price is INR 100, block deals can take place at any price from INR 99 to INR 101. This can lead to a small difference in the opening price and the previous close price of the stock. - Post-close session
After the markets close at 03:30 PM, a closing price is calculated for all the stocks. Another post-close trading session takes place from 3.40 PM to 4.00 PM, where all trades happen at the closing price. However, the demand and supply dynamics can change during this time period, before trading resumes the next day.
Example: If a security closed trading at INR 50 and there are still some sellers at this price, but the buyers start buying out all securities at INR 50 in the post-close session, then the opening price on the next day will tend to move higher as there are no more sellers left at this price. - News about the company
One of the major reasons for a gap-up or gap-down opening in the stock price is the release of news about the company. If these corporate announcements become public after the markets have closed, then they have the potential to significantly change the market demand overnight.
Example: If a company does a press release in the evening (after markets have closed) that they have received a huge order from the government, then the opening price will likely be higher than the previous closing price, as the market will expect a jump in revenues of the company. - Off-market financial results
Many times companies declare their quarterly or annual results in the evening or on weekends when the markets are closed.
Example: If a company notifies the stock exchange that there will be a board meeting to declare the annual results on 20 April (assume it is a Saturday) and the results are very good, then the stock prices are likely to open higher on Monday. The stock exchange is usually notified in advance about the date on which the results will be released. - Market sentiment and economic changes
Economic factors and market sentiments can impact multiple companies and sectors at the same time.
Example: If news breaks out in the evening that has a significant economic impact on Indian businesses, the markets may open lower the next day. - Corporate actions
Unlike other events which are virtually impossible to predict and control, corporate actions of companies are pre-planned events. These events are known before hand and the investors can be sure that the opening price will be massively different from the previous Close Price. Let us look at some of the corporate actions and how they directly impact the prices on the ex-date.- Dividend – When companies pay out dividends, the price of the stock reduces by the dividend amount. This happens because the book value of the company has decreased as cash has moved out from the Balance Sheet.
Example: Suppose the stock price closed at INR 1,000 just before the ex-date. The company pays out INR 25 as dividends. The investors will notice that the Open Price on the ex-date will be around INR 975. - Stock Split and Bonus shares- When companies split their stocks or issue bonus shares, the share price will reduce by an equal amount as the stock split ratio or the bonus share ratio. This happens because splitting a stock or issuing bonus shares does not change the fundamentals of the company in any way.
Example: Suppose a company announces a 2-for-1 stock split. This means that for every share held by the investor, they will receive an additional share. If the stock price before the split was INR 2,000, after the split, the price per share will reduce to INR 1,000. The investor will now hold two shares for every one share they held previously, but the total value of their investment will remain the same. - Rights Issue – When companies issue new shares through a rights issue, the existing shareholders have the option to purchase the new shares at a discounted price. This dilutes the ownership of the existing shareholders. As a result, the stock price on the ex-date of the rights issue will typically drop by the amount of the discount offered to the shareholders.
Example: Suppose a company announces a rights issue at a price of INR 100 per share, with a discount of 25% for existing shareholders. If the stock price before the rights issue announcement was INR 1,000, on the ex-date of the rights issue, the price may drop to around INR 925, reflecting the discount offered to existing shareholders. - Merger and Acquisition- When a company announces a merger or acquisition, the stock price of both companies involved may be impacted. In a merger, the stock price of the acquiring company may go down, as investors may be concerned about the cost of the acquisition and the potential dilution of their ownership. Conversely, the stock price of the target company may go up, as investors may expect to receive a premium on the acquisition price. In an acquisition, the stock price of the acquiring company may go up, as investors may see the acquisition as a positive sign for the company’s growth prospects. The stock price of the target company may also go up, as investors may expect to receive a premium on the acquisition price.
- Share Buybacks- When a company buys back its own shares, the outstanding shares decrease, which can result in an increase in the stock price. This is because the earnings per share (EPS) of the company increases, as there are fewer shares outstanding to divide the earnings among. Additionally, share buybacks can be seen as a sign of confidence by the company in its future prospects, which can also boost investor confidence in the company.
Example: Suppose a company announces a share buyback program to repurchase 10% of its outstanding shares. If the stock price before the announcement was INR 1,000, the price may go up after the announcement due to the reduced number of outstanding shares.
- Dividend – When companies pay out dividends, the price of the stock reduces by the dividend amount. This happens because the book value of the company has decreased as cash has moved out from the Balance Sheet.
