How is the opening price of a share determined

How is the opening price of a share determined?

If you are new to the stock market, you might not know how is the opening price of a share determined? Why does the stock open at a specific price which is higher or lower than the previous day closing price? What determines this opening price if the stock market is closed.

The Indian stock market works for five days from Monday to Friday. The normal trading session is between 9:15 AM to 3:30 PM in both the major stock exchanges of India- BSE, and NSE. However, before the normal trading session, there is a small pre-opening session from 9:00 AM to 9:15 AM every day. This is the period when the opening price of the shares is decided.

But what exactly happens during this period? And how is the opening price of a share determined?

This is what we are going to discuss in this post. Today we are going to discuss how is the opening price of a share determined. But before we discuss it, there are few basics that you need to know first.

Types of order

There are two types of order that you can place for a buying/selling of shares in the share market:

  1. Market Order: It is the order when the stocks are bought/sold at the market price and is executed instantaneously. For example, assume that you want to buy ten stocks of a company that is currently trading at the market price of Rs 90. When you place the market order, you will buy the stocks at the market price i.e. Rs 90.
  2. Limit Order: This order refers to buying or selling the stocks at a limit price. For the same example stated above, let’s assume that now you want to buy the stocks at Rs 88. Then you can place a limit order and once the market price of the stock falls to Rs 88, the order is executed.

The market order is instantaneous whereas limit orders occur depending on the fulfillment of supply and demand.

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Pre-Opening session in a market

The pre-opening session is divided into three segments- The order collection period, order matching period, and buffer period. Let us understand each one of them in detail now.

  1. 9:00 AM to 9:08 AM – This session is called the Order Collection period. You can place, modify, and cancel your order during this time period. However, no execution occurs during this period.
  2. 9:08 AM to 9:12 AM – This is called order matching period or trade confirmation order. You cannot place, modify, or cancel your order during this interval. Placed orders are executed during this period based on the price identification method. This is also called equilibrium price determination or Call auction.
  3. 9:12 AM to 9:15 AM – This period is called buffer period and is used for easy transition from pre-opening session to normal market session.

Also read: Stock Market Timings in India

How is the opening price of a share determined?

The opening price of the share is determined during the call auction. As soon as the order collection period is over, the order matching period starts.

The order matching happens in the following sequence:

  1. Eligible ‘limit’ orders are matched with eligible ‘limit’ orders.
  2. Residual eligible ‘limit’ orders are matched with ‘market’ orders.
  3. ‘Market’ orders are matched with ‘market’ orders.

Now, let us understand how the opening price is decided with the help of an example.

Example to Understand Opening Price Determination

Assume that during the order collection period, following demand (buy orders) & supply (sell orders) were available for different stock prices for a company named ‘ABC’. I had customized a simple table for easy explanation.

Here, you can notice that there are different quantities of demand and supply of stock for different share prices (based on the buy and sell order placed).

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Share PriceDemandSupplyMaximum Tradable Quantity
1001100900900
1018001100800
102100012001000
103500600500
104400700400

The opening price is determined based on the principle of demand and supply mechanism. It occurs at the equilibrium price, where the maximum volume (tradable quantity) is executable.

If the above example, the maximum tradable quality was possible at a share price of Rs 102. Hence, Rs 102 will act as the opening price for the share.

All the outstanding orders, which are not executed in the pre-opening session, will move to the normal market session.

Quick Note: The above table is created in a simple way to let you understand the basics. However, in real-time scenarios, there will be tons of volume of buy and sell orders, making it quite complicated.

Summary

The equilibrium price determined in the pre-open session is determined as the opening price for the share.

That’s all for today. I hope this post on ‘How is the opening price of a share determined?’ is useful to the readers. If you have any doubts, feel free to comment below.

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Also read: How to Invest in Share Market? A Beginner’s guide

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