The price of stock A closed at $20.00 yesterday but it opened at $19.60 today.
Where did my 40cents go you might you wonder. Don't worry, it is not a collusion set up by the company.
I will sum it up for you why it falls to 40cents.
During the period where the market closes and opens again, there will be full of opinions and speculations(i.e financial crisis, bank collapse, job data) looming around the company per se, and this indirectly affects the outlook of the company as well.
Before the market open, investors are allowed to place orders with their brokers.
These orders are categorized into buy and sell orders.
Conversely, for people who are skeptical of the growth of the company, they will sell their stocks at a price say $18.75, $17.50 or even $16.50.
So since there are so many different buy and sell orders before the market opens again, how does the stock broker set the price?
You might say that judging from the chart, of course I will start $20 since that's the highest bid. But do you realise that if you start at $20, only 100 people will buy from you and everyone else on the sell orders side will be able to sell their stocks?
That way, you will end up with too many stocks floating around and that is extremely dangerous for your company. With too many stocks floating out there, the company most likely will have to pick up the debris and purchase it themselves. That is seriously not a viable choice to be honest.
The best choice is to pick an equilibrium price that shows an equal number of sellers and buyers. That is the perfect scenario, that way, no stocks will be left floating around.
Sounds simple right? Haha, this is just the tip of the iceberg when it comes to prices fluctuation in the market though. I will be sharing more when I have the time.
See ya.
Credits -optionsatoz, -wineenthusiasts, -najoomi, -affordablehousinginstitute
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