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 close the day before. For example, if the One-Legged Chair Co. (ticker: OOOPS) announced that a batch of recent legs were defective and issued a recall, many more sell orders than buy orders might accumulate overnight for the stock. 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, 2002, computer services company Electronic Data Systems (NYSE:EDS) issued a major earnings warning, saying it would likely earn only $0.12 to $0.15 per share in the third quarter, nowhere near the $0.74 it expected. Blamed 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 $37.00 per share, hit an intra-day high of $37.85, and closed at $36.46. Ho-hum. But jeepers -- the next day, Sept. 19, the stock opened at $21.90 -- down a whopping 40% from the previous close. It closed on the 19th at $17.20.
The news was enough to knock down (to lesser degrees) other computer-related concerns, too.
More recently, online wunderkind eBay (NASDAQ:EBAY) reported earnings and projections not quite as extreme as most investors had expected, given the company's history of torrid growth. The announcement happened after the market closed on Jan. 19, and on Jan. 20, the stock got a major haircut of roughly 20%.
Stock prices often don't move in straight lines.
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