The Open Price of security on any given day is the price at which the security has started trading on that day. The price is determined based on a Call auction mechanism, where the traders first submit orders, and then these are matched to decide the opening value of the security. The prices are calculated in a pre-opening session from 09:00 AM to 09:15 AM run on the Stock Exchange. This is a very efficient method for proper price realization, without any excessive volatility. The supply and demand of the securities determine the price at which they open. If no unique price can be discovered in the pre-opening session, then the first price at which the security trades in the normal session becomes the Open Price. The trading activity in the individual stocks will directly decide the opening of the indexes like SENSEX, NIFTY, etc. The price at which the trading starts in a day could be different from the previous day’s Closing Price of the stock. There can be multiple reasons for a large change in these two prices.
In general, terms, to calculate the Open Price of stocks, the following steps are done on the Stock Exchange:
Step 0: Orders are placed in the pre-opening session
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
Step 3: This price is decided such that maximum shares get traded and the imbalance of orders is minimum
Step 4: Eligible trades are executed on this single open share price
Step 5: Orders that were not executed are put in the pending Order Book for the normal trading session
Some Buy orders and Sell orders get executed at a better price. That means 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:
• Execution of all orders in the pre-opening session happens at this price
• To determine the opening value of the market Index: NIFTY, SENSEX, etc. • Building price charts like Candlesticks, Heikin-Ashi, etc.
• Used in intraday trading strategies involving Gap-up or Gap-down opening
Why Open Price is different from the Previous Close Price?
Regular traders and investors might have noticed that when the stock market opens, the Open Price of stock on any day could be higher or lower than the Closing Price from the previous day.
Example: If the closing price today of a stock is INR 100, it is not necessary that the trading will open tomorrow at exactly INR 100.
The main reason why the open price is different from the previous close price is large is because of the method by which these two prices are calculated. In addition, there are also other external factors that can contribute to the price mismatch.
The main reason why the open price is different from the previous close price is large is because of the method by which these two prices are calculated.
Close Price- The Last Traded Price (LTP) and the Closing Price of stock are two different concepts. The LTP refers to the price at which the last trade happened on any day. Whereas the Close Price at the end of the day is calculated by taking the weighted average of the stock prices in the last 30 minutes.
Open Price – On the other hand the Open Price is decided through a call auction mechanism (Pre-Open). The supply and demand at the start of the day can move the prices in either direction.
Since a price discovery takes place on every trading day, external factors can impact the opening prices.
External Factors which impact Opening Price of Instrument-
1. Sudden price movement before market close-
The Closing Price is a Volume Weighted Average Price (VWAP) of the last 30 minutes of trading time. It can be imagined that if there are no other factors involved, then the trading on the next day should resume from the LTP and not the Close Price. This is because the Closing Price itself could be largely different from the LTP.
2. Block Deal window
Block Deal refers to a large trade that happens on a single order. In the stock markets, there are 2 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. So if the previous closing price is INR 100, then the block deals can take place at any price from INR 99 to INR 101.
Therefore, since these deals take place before the market opens, the Open Price can easily move by 1% in either direction from the previous Close Price. This can lead to a small difference in the open price and the previous close price of the stock.
3. 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. All trades in this session happen at the Close Price, so the price of the security does not change at this time. However, the demand and supply dynamics can change during this time period, before trading resumes the next day. Example: Suppose security closed trading at INR 50 and there are still some sellers at this price.
Now, assume there is a change in the demand and 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.
4. News about the company
One of the major reasons for a gap up the opening or a gap down opening in the stock price is the News release about the company. If these corporate announcements become public after the markets have closed, then these have the potential to significantly change the market demand overnight.
Example: Suppose in the evening (after markets have closed), a company does a press release that they have received a huge order from the government.
There is a good chance that the Opening Price will be higher than the previous Close Price as the market will expect a jump in revenues of the company.
5. Off-market financial results
It is not just unpredictable News releases that can move prices. Many times companies declare their quarterly results or annual results in the evening or on weekends when the markets are closed.
Example: let us assume the 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). If the results are very good and profits have increased significantly, then the stock prices are bound to open higher on Monday.
Although it is impossible to predict what the results might be, if they are released when the markets are closed, the investors get an opportunity to analyze the results. Based on the judgment of the participants, one can expect a movement in the Opening Prices when the markets open next time.
The Stock Exchange is usually notified in advance about the date on which the results will be released. Therefore, investors will appreciate the fact that it is possible to know beforehand when the companies will be declaring their results.
6. Market sentiment and Economic changes
This factor is similar to the news release about the companies. We mention this point separately because economic factors and market sentiments can impact multiple companies and sectors at the same time.
Example: On a particular day in 2016, the Sensex closed at a price of INR 27,591.14. Then, news broke out in the evening which had a significant economic impact on Indian businesses. The next day, the markets opened more than 1% lower.
7. 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.
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.