Why would a stock close at one price on one day but then commence trading the next day a few dollars lower? Well, stocks often open higher or lower if there's been some major news released after the market closed the day before. For example, if the make-believe underwater dress-shoe company Wet Loafers (ticker: SQSHY) announced that it was recalling all of its watery wingtips, many more sell orders than buy orders might accumulate overnight. Before trading begins, the share price would probably be adjusted southward, to better match buys with sells.
Here's a real-life example: After the market closed on Sept. 18 a few years ago, computer-services company Electronic Data Systems (NYSE:EDS) issued a major earnings warning, in which it said it would likely earn only $0.12 to $0.15 per share in the third quarter, nowhere near the $0.74 that had been expected. Taking the blame were reduced spending by existing customers, fewer new sales, and the company's increased spending on "sales pursuits and processes to leverage an increased business pipeline."
On Sept. 18, before the bad news broke, the stock opened at $37 per share, hit an intra-day high of $37.85, and closed at $36.46. Ho-hum. But jeepers -- the next day, the stock opened at $21.90 -- down a whopping 40% from the previous close. It closed on Sept. 19 at $17.20.
The news was enough to knock down (to lesser degrees) other computer-related concerns, too, such as IBM, Sun Microsystems, Computer Sciences, Accenture, Dell, and Hewlett-Packard.
The moral of the story? Stock prices often don't move in straight lines, as much as we wish they would.
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