How can a share price rise when the market is closed?

Dear Panel,

Could you please explain to my why it is when I buy shares through my broker online and they give me the price I have to pay (copy best sell price) and this transaction is when the stock exchange is closed, and the next morning when the market opens the shares have opened higher than the price I offered and I miss out on the stock. How can the stock rise when the market is closed? And how do I know when to increase my offer when I trust my broker to buy my shares at the price they have nominated for me.

When you place a BUY order outside of normal market hours, ie after 4.10pm (AEST), your broker will quote you what the last traded price was or what the best buying/selling price is. After 4.10pm orders are not permitted to be placed into the market. Orders can only be placed into the market from 7am the following morning.

On the following morning, your broker will place the order into the market before market open at your price nominated. This is not to say that that stock will open in the morning at the quoted/last traded/best selling price. The stock does not trade when the market is closed, but, you have to realise that in the pre-open phase (7am – 10am) orders from all brokers are placed into the market just like yours. BUY orders can be placed at prices higher than your order and similarly SELL orders can be placed at prices lower than yesterday’s closing price.

A situation will then occur where there are overlapping BUY and SELL orders in the market prior to the opening. When the stock eventually opens all the overlapping BUY and SELL orders are ‘matched off’ or executed at a single opening price. This means that all overlapping orders will be executed at one single price regardless of what your original price was. This single executed price is determined by the ‘supply and demand’ for that stock.

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If there is a high demand for the stock, it will open at a higher price than yesterday’s closing price or even higher than yesterday’s best selling price. Likewise, if there is a high supply of the stock, then the opening price for the stock will be lower than yesterday’s closing price or even lower than yesterday’s best buying price.

So basically even though you have placed your BUY order at the best seller’s asking price, this does not mean that you will get the stock. If you want to make sure that you buy your stock no matter what, you can instruct your broker to place the order ‘at market’, or you can place the order at a slightly higher price than the last traded/best sellers price and go into the ‘matching phase’.

With regards to ‘trusting your broker to buy your shares’: your broker can and will only place your order at the price that you have nominated. The broker cannot change the nominated price without your permission. Also, the broker, or anyone for that matter, does not know what the price of a stock will open at in the morning.

Sean Nofal, amscotOnline Manager, Amscot Discount Stockbroking

Important Information

The views expressed in this article are those of Sean Nofal, amscotOnline Manager. Amscot Discount Stockbroking is a division of State One Stockbroking Ltd, a participant of the ASX Group. ABN 95 092 989 083. AFSL 247100