Investment in stocks requires careful analysis and a lot of research for the investment to be profitable. This requires the investors to keep track of the prices of the stocks to ensure that they are traded at optimum prices. For average investors, the closing price of the stock is not different from the last traded price of such stock. However, these are quite different concepts.
While the last traded price is the price at which the stock was last traded, the closing price of the stock is calculated to be the weighted average of all the prices at which the stock is traded in the last half hour.
Let us consider the following example of stock A for a better understanding of closing prices. We will consider the trading volume (quantity of shares) and the trading price of such volume to calculate the closing price of the share.
|Trading Volume||Trading Price||Trading Time||Product|
The closing price of stock A in the above example is not Rs. 56 as per the last trade. In this case, the closing price will be calculated by dividing the total product (1872) by the total quantity traded. This will result in a closing price of Rs. 52 (1872/36)
Closing price vs Adjusted closing price
The closing price as mentioned above is calculated based on the weighted average price of all the trades in the last half hour of trading i.e. between 3 pm to 3.30 pm. The closing price is further different than the adjusted closing price.
The adjusted closing price is the price that is reflected when the stock is split. This action is done to boost the liquidity of the stocks in the market. A stock split is when the stock is divided into multiple shares in a fixed ratio. The most common split ratio is usually 2:1 or 3:1 i.e, a single share is split into 2 parts or three parts. In such a case, the last closing price will be split to accommodate the adjusted closing price. If the stock is split in the ratio of 2:1, then the adjusted closing price will be the last closing price split in half.
Pitfalls of the closing price
Closing prices are the pieces of the strokes at the end of the trading day. One of the main drawbacks of the closing price is that it does not accommodate any changes that have occurred after the close of trading hours that have the potential to impact the prices of the company’s stocks dramatically. Such events may be news relating to declaring dividends, mergers or acquisitions, stock split or reverse stock split, etc. Such news is usually declared after the closing of trading hours so the investors have time to reflect on them and analyze them carefully.
Such news usually impacts the prices of the company’s stocks greatly in after-hours trading. However, the volume of such trade is significantly lower than trading in the open market hence the investors have to be careful of such price deviations in after-hours trading.
Importance of volume-weighted average price
Volume weighted average price is a key indicator to get information on the average price of a particular stock. VWAP is a common tool used by traders and analysts to calculate the price of stocks based on all the orders during trading hours. It is also considered as a baseline for many traders and analysts to know the correct price or level at which the stock is traded through the trading day. It also helps the traders to take positions relating to such stock whether long or short to get the maximum advantage or profits through trading.
An average investor sees investing in stocks for long-term purposes and in premium stocks that have proved to be quality and high-performing stocks over the years. For such investors, the daily closing price may not hold as high importance as for an average trader. For traders and analysts, the information on the closing price of stocks is essential to make sure that they make sound trading decisions and maximize returns on their portfolios.
Frequently Asked Questions
Is the volume of stock traded an essential factor in calculating the closing price of any stock?
Yes. The volume of stocks traded is an essential factor for calculating the closing price of any stock as it is calculated based on the weighted average price of that stock.
Can the last price of the stock be treated as the closing price of that stock?
The last price of a stock can be treated as the closing price of that stock if there is only one trade of such stock in the last half hour of trading.
What is the last price of the stock?
The last price is the price at which the stock is last traded during market hours.
What is the duration considered for the calculation of closing price?
The duration considered for calculation of closing price is the last half hour of market hours i.e. from 3 pm to 3.30 pm.