Closing Price - Meaning, Vs Settlement Price, Importance, Vs LTP (2024)

Closing Price Meaning

The closing price is the trading price of a security at the end of the trading day on a financial market. Until the subsequent trading session, this is the most current value of a security. The closing price of an asset is the fundamental yardstick that traders use to measure its performance over time.

Closing price means the last price for which a stock trades during a normal trading session. Regular trading hours for several U.S. markets are from 9:30 a.m. to 4:00 p.m. Eastern Time. The closing price will not represent share splits, cash, or scrip dividends. Instead, the closing price helps traders measure stability and identify critical price levels combined with the open price.

• Closing price means the final price of a security during an end of a normal trading session day on a financial market.
• The closing price of an asset is very important as it acts as a fundamental yardstick that traders use to measure stability and identify critical price levels and stock performance over time. However, it does not represent share splits, cash, or scrip dividends.
• A weighted average of the trade prices in the final 30 minutes of the trading session is used to calculate the closing price.

Closing Price Explained

Several exchanges allow after-hours trading, and some financial media and market data suppliers use the latest deal in these after-hours marketplaces as the daily closing price. Others use the price at 4:00 p.m. as the closing price (CP) and display after-hours trading prices separately.

Therefore, to eliminate misunderstanding, the Consolidated Tape Association, the principal distributor of transaction prices for exchange-traded securities, devised a method to standardize closing prices. Hence, this method's typical session CP for equities is at 4:00 p.m., so each day at 4:00 p.m. Eastern Standard Time (EST), the world's most famous closing bell, signifies the trading floor's closing on Wall Street. As soon as the closing bell sounds, the final prices traded become the closing prices of stocks.

After-hours trades do not impact the regular session closing price or high and low. However, it is worth noting that market activity does not stop even after an exchange floor is closed. After-hours trading also happens, although liquidity and volume are lower. It allows investors to respond to overnight news without waiting for the exchange to open. It is also perfect for those unable to trade throughout the day.

Albeit, different market data sources may report a stock's CP differently. This mismatch can cause ambiguity. For instance, the CP reported on a firm's website may differ from the price displayed at the bottom of the market news channel screen. The following day, the trader may read that the share opened "up" despite opening "down" relative to the regular market close.

Adjusted Closing Price

We have discussed why closing stock prices are beneficial; they can provide a decent indication of market mood. However, it is essential to note that stock market closing prices do not account for company events such as mergers, acquisitions, dividends, and stock splits. Hence, "adjusted closing price" comes into play. It reflects company actions and payouts before the opening bell the following day.

One such corporate move is a stock split; it makes a company's share price more appealing to investors. For instance, if the board of directors decides to split the shares four-for-one, the share price will get divided by four. Therefore, if the shares ended the day before the stock split at £20 per share, the adjusted closing price following the stock split would be £5.

How To Calculate?

A share's closing price calculation is the price at which trading ceased after the trading day. Hence, a weighted average of the trade prices in the final 30 minutes of the trading session is used for calculating the CP of any securities.

Though there is no specific closing price formula, it can be computed using the following steps:

#1: Compute the price at which a stock trades between 3:00 and 3:30 p.m. Find the number of shares traded at each price.

#2: Multiply the price by the quantity to determine the 'Total Trading Value/ Product.'

#3: Calculate the total number of traded shares (Total Volume).

#4: Determine the Close Price using the following formula:

Close price = Total Trading Value / Total volume

Examples

Let us consider the following examples to understand the concept better:

Example 1

Two shares of a company traded at $5 each at 3:30 pm. One of these shares was trading at $10 at 3:45 pm. Again both the shares saw a considerable hike, raising their value to $15 per share at 4 pm.

Totaling the value of the shares, we get $10 for the two shares trading at 3:30 pm multiplied by $5, one share $10 at 3:45 pm, and $30 for the two shares trading at 4:00 pm multiplied by $15.

The closing price for the shares = Total Trading Value / Total volume of the shares

= ($10+$10+$30)/5

= $50/5

= $10

Though the closing price for the deal is $10, the last traded price is the last price of the trading hour, i.e., $15

Example 2

Let us consider the following example of stock 'xyz' to understand closing prices better. First, we will consider the trading volume (quantity of shares) and the trading price of such volume to calculate the share's closing price.

The closing price of stock 'xyz' in the above example is not Rs. 56 as per the last trade. In this case, the CP will be calculated by dividing the total product (Trading volume* trading price) by the total trading volume. This will result in a CP of Rs. 49 (2508/51)

Importance

The closing stock price is a crucial statistic for every stock as market factors are derived from this price. For example, the Close Prices at the beginning and end of a certain time are compared to determine the stock performance throughout that period.

The daily market mood for investment is gauged by comparing the CP to the afternoon price of the previous day. For example, the stock price will likely drop if a corporation releases negative updatesin the morning. Thus, after some commotions have subsided, the market has had a chance to process the news. However, the market's CP will more accurately reflect the mood.

Closing stock prices are significant because comparing the closing prices of securities across different days or months can assist investors in understanding changes in a security's worth over a certain period. In addition, when examining the past returns of an investment, closing prices are often beneficial.

Closing Price Vs Settlement Price Vs Last Traded Price

Closing price, settlement price, and last traded price are terms that are found to be used synonymously despite differing widely in several aspects. Some of the differences between the three include the following:

• While the closing and settlement prices are the same in the case of liquid contracts, they are different from other financial agreements that traders and investors sign.
• The closing price is normally the last trading price of the trading hours. On the contrary, the settlement price is the official price at which traders book their deals in the stock market.
• So far as the closing price and last traded price are concerned, these are the same in many cases, but not in every case.
• While the last traded price is the real last traded price, the closing price is the weighted average of the last half-an-hour of the trading hours.

Frequently Asked Questions (FAQs)

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This has been a guide to Closing Price & its meaning. We explain its differences with settlement price, importance, vs Last Traded Price, and examples. You may learn more from the following articles -

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