Closing price is among the most commonly referenced indicators of the stock market. It describes the final price at which security is traded on a regular session.
Investors, analysts, and traders commonly rely on closing price when ascertaining investment decisions, measuring the market emotions, and setting the trends. But sometimes, just closing price cannot depict the entire situation.
Therefore, knowing how to calculate it, how it functions in trading, and what risks lie with complete dependence on closing price, one also needs to know about adjusted closing price.
This article discusses closing price, why it is so important in analyzing the stock market, pitfalls one may encounter when solely relying on this measure, and how the adjusted closing price factors in some events that occur within the market.
We will further discuss how investors and traders can be better informed by understanding these factors.
Understanding the Closing Price
The last price at which a stock or other financial asset is traded during a regular trading session is called a closing price. In most markets, like the New York Stock Exchange (NYSE) and NASDAQ, trading happens between 9:30 AM to 4:00 PM EST. The late-day price is essentially the last trade occurring at 4:00 PM, which reflects the terms under which the last buyers and sellers met.
Closing prices are important in that, very frequently, they are employed to measure how a stock performs on a trading day. In all likelihood, it is one of the most quoted prices on any given stock and is also employed in tracking variations in its price in relation to time.
In the majority of the cases, short-term trend analysis employs closing prices by the investors and analysts, where they will ascertain if the stock moves upward or downwards.
For instance, when the closing price of a stock goes up for days one after another, it can be visualized as a conducive time to buy. Declining closing prices determine bearish conditions.
So, the closing price is considered to be the best price for the day for most stocks in any given report, chart, or news medium.
The closing price is also a base for important technical indicators such as the moving averages, price oscillators, and the trend lines. Investors can have an idea that whether the stock or even the whole market may move in a given direction in near future.
Therefore, it is critical to both technical analysis and fundamental one.
How is closing price Used?
1. Benchmark Performance
Closing Price In relation to the stock, as a reference point to measure how the price performs against the previous price, closing price can be used as a good reference point.
The way an investor will see that the stock is closing higher than the previous days will determine how the momentum goes upwards or downwards. In that case, a closing price consistently higher than that of the previous day means it has bullish sentiments, hence, better investor confidence.
2. Technical Charting and Analysis
Technical analysts derive their charts, trend, and support or resistance levels constructions based on the closing prices of the stocks. For instance, the 50-day and 200-day moving averages are commonly calculated using the closing price of a given stock.
The moving averages give a general sense to an investor as to the direction in which a stock’s price is taking for a given period.
3. Valuation
Investors apply closing prices to further establish the idea that a stock is overvalued or undervalued. Therefore, comparing the stock’s closing price with the EPS or other fundamental metrics will enable investors to further establish the idea about its valuation.
For instance, the Price-to-Earnings (P/E) ratio is calculated by dividing the closing price of the stock by the earnings per share; it basically provides a snapshot of the valuation of the stock relative to its earnings.
4. Closing Price as an Indication of Liquidity
Even the closing price can be said to indicate a level of liquidity. A spurt in closing price of stock with high trade volume is interpreted as interest shown in the particular stock, presumably due to arrival of new information or change of sentiment.
Drop in closing price with low volumes may be termed as lack of conviction among trading forces and may not sustain the direction in price movement.
5. Contrast with Indices
The closing price of shares is to be compared either with the S&P 500 or the Dow Jones Industrial Average by an investor to see how the stock performs with respect to that in the broad market.
Thus, if the closing price of a stock moves opposite of how the market index is moving, this may imply that the stock is underperforming or has some strength against broad market declines.
Limitation to rely on the Closing Price only
Closing Price is an excellent indicator in a bid to explain movements in a market. There are limitations also for such usage and conclusions, some of which have been summarized in this study:
1.Overlooking Pre-Market and Post-Market Trading: The Closing Price only presents the last hour traded price during regular hours only. It shows no changes throughout the premarket or post market sessions. Given that the market sessions of premarket and after-market are, in general a little less fluid and volatile the changes may seem enormous in size. If a company declares some significant news after hours, then the stock price may move sharply that the closing price fails to reflect.
2. Neglects Intraday Price Volatility: The closing price is just a snapshot of the actual price of stock at the closing time of a trading day; it does not represent the intra-day volatility in price. Imagine that a specific stock opens, and its opening price has drastic increases and declines throughout the intra-day, and their closing price in no way matches its price on the trading day. Still, those give very important ideas of the thinking by investors.
3. overlook Dividends and corporate action: Dividend, stock split, and the other corporate action are misleading events because of its impact on closing prices of shares. For example, on ex-dividend date of the dividend-paying stock the amount of dividend goes down by a price. As a result, if an investor relies solely on the closing prices, then the respective changes in these scenarios will not be made and the stock performance would have been misestimate.
4. Short term orientation: It becomes sensitive about closing prices more on short run; for instance, when looking into the chart, the time range might be within the period of days, and for investing decision instantaneously, just taking out a decision for or against investing purely on basis of closing price, especially only closing prices within day time but considering nothing at larger scale level that can prove harmful to wrong decision for investments.
5. Price Manipulation: In some cases, the last trading minutes of the market may not reflect a fair price of the stock. As explained in the above example, huge institutional investors place massive orders at the close of the trading session.
Due to this reason, a price that does not represent the actual value is established at close.
Adjusted Closing Price
Adjusted closing price is a modification of the closing price which analysts and investors use to avoid some pitfalls of the regular closing price. The adjusted closing price accounts for corporate actions like dividend, stock split, and rights offering.
1.Dividend Adjustment
An adjusted close for the dividend payment reflects that because of the ex-dividend date, the price of the stock has fallen. In the absence of an adjusted price, that drop might be interpreted as a decrease in worth for the stock instead of just the usual adjustment due to the payment of a dividend.
2.Stock splits and reverse splits
A stock split refers to when the company issues new shares to the shareholders so that the share of the company becomes relatively cheaper to more investors. In a similar sense, reverse stock split is about consolidating the shares for the purpose of raising the price per share.
In both cases, the adjusted closing price accounts for the change in the number of shares, ensuring that historical comparisons remain valid.
3. Rights Issues and Corporate Actions
The adjusted closing price helps investors track the actual movement of the price in the case of rights issues or other corporate actions. For example, if a company issues new shares at a discount, the adjusted closing price reflects the new price level, which would be more accurate in representing the performance of the stock.
Investors, therefore can be able to do some valid comparisons from stock to another overtime and analyze longer-term trends in stocks as this adjustment takes the noise produced by dividends and corporate actions to filter the noise so long-term investors who wish to be able to look at true values of their stock.
Conclusion
The Closing price is an important fundamental tool that allows a trader to form value ideas about the stock with respect to their daily performance in the trade. Investors and analysts use it in making short-term decisions, trend-tracking, and market sentiment analysis.
It suffers from the disadvantage of not totally capturing the value of the stock because of intraday volatility, market events post-hours, or corporate actions such as dividend announcements and stock splits.
As adjustments for these effects, investors rely on adjusted closing prices, whereby all those corporate actions relating to dividends, splits, and any other corporate actions have already been taken into account, thus making the view of a company’s stock behavior completer and more consistent over time.
This means that knowledge of the limits and proper usage of closing price and adjusted closing price enables the investor to decide intelligently based on what might be needed to have consideration towards understanding the overall scope of considerations in the market that could go against the worth of a stock.
Frequently Asked Questions
1. How to calculate closing stock price?
The closing stock price is therefore determined by the last trade executed at the close of the day’s regular session. For most marketplaces, it would include such exchanges as NYSE and NASDAQ, although this typically happens at 4:00 EST.
The point at which this final trade took place between buyer and seller shall be the close price. It is susceptible in some instances to the final bids and offers at the end of the trading day in the last minutes of trading.
In some instances, in cases of unusual market conditions or volatility, some exchanges also apply a special closing auction process to determine the final price.
2. What is the 10 am rule in stocks?
The “10 AM Rule” is an informal guideline used by traders, suggesting that a stock’s price and market direction after 10:00 AM (Eastern Time) is a more accurate reflection of the market’s trend for that day.
The reason is that the first hour of trading from 9:30 AM to 10:00 AM usually depends on the opening volatility, news, and investor reactions. At 10 AM and beyond, the market becomes stable as the traders become more sure of how the stocks will act for the remainder of the session.
3. What is closing price in stock?
Closing price in stocks refers to the last price at which a stock trades at the end of a trading day, which is basically the close of that day’s market activity.
It is highly employed to evaluate the performance of the stock and is the one, which news media highlights, the file of the report of the stock market, as well as, technical analysts employ it to know the trend and for drawing charts.
Sometimes, closing price is quoted and comes to be the most vital price for trading day as that reflects supply as well as demand at the market’s close.
4. Is it possible to buy stocks at closing prices?
You cannot buy stocks at the closing price point, except if your order has been executed during the last few minutes of the trading session at that closing price point.
Typically, in an ordinary trading session, the last price is same as the closing price.
However, if you entered an order during near-market close conditions, your trade may be processed a little earlier or later than the official market close, and this will again depend on order type and specific market conditions.
A common investor practice is to use an MOC order, where they instruct their broker to enter the trade at the closing price, to purchase at the close.
5. What is the formula for closing stock?
The formula with which accountants do the calculation of the closing stock serves as a measure of valuing stock within any given accounting period, is
Closing Stock=Opening Stock + Purchases – Cost of Goods Sold (COGS)
Where,
• Opening Stock refers to the valuation of the stocks in inventory for the opening part of the accounting period.
• The total value for the purchases on stocks acquired throughout that accounting period
• COGS- The cost for the goods that have been sold in the said accounting period
6. What is the 3/30 formula?
The “3/30 formula” is a trading strategy adopted by some technical traders. It makes use of a 3-day and 30-day moving average to determine buy or sell decisions. The concept behind the formula is as follows:
• 3-day moving average: A shorter moving average that reacts quickly to price changes and gives a sense of the stock’s recent momentum.
• A 30-day moving average: A longer averaging that tends to smooth out fluctuation and portrays a general feel of the tendency of the stocks.
The strategy usually advises buying when the three-day moving average crosses above the thirty-day moving average, it’s a golden cross buy and a sell signal whenever the three-day crosses below the thirty-day moving average-the dreaded death cross.
The method is then entered for trading as to cascading momentum or trend change within the market