The closing price of a stock is the price at which the share closes at the end of trading hours of the stock market. It is not to be confused with the last trading price or LTP, which is the final price at which the stock was traded before the markets closed.
In simple terms, the closing price is the weighted average of all prices during the last 30 minutes of the trading hours. Whereas the previous trading price is the final price at which the stock was traded before the market closed for the day.
How is the closing price calculated?
To know the closing price of a stock, you need to know all the prices at which it was traded between 3 PM and 3:30 PM. Here’s an example for calculating the closing price of stock A.
At 3 PM, the two shares of stock A were traded at Rs. 10 a share. At 3:10 PM, two more shares were traded at Rs. 12. At 3:20 PM one share of stock A was trading at Rs. 11. At 3:30 PM the price went up to Rs. 20 a share and two shares were traded.
Now to calculate the closing price, first multiply the number of shares to the price at the particular time. So, at 3 PM the total product is Rs. 20 (two shares multiplied by Rs. 10), at 3:10 PM the total is Rs. 24, at 3:20 PM it is Rs. 11 and at 3:30 PM it is Rs. 40. Add these values to find out the total product traded in the last 30 minutes: Rs. 95.
The closing price is calculated by dividing the total product by the total number of shares traded during the 30 minutes. So your closing price is Rs 13.57 (Rs. 95/7).
You last trading price is, however, Rs 20, which is the price at which the stock was traded last.
Can closing price and last trading price be the same?
As explained above, the closing price and last trading price are quite different. However, in one particular instance, the closing price can be the same as the previous trading price.
If no shares of a particular stock are traded in the last 30 minutes of the market, the last trading price becomes the closing price.
Let us retake the previous example to understand it better. At 2 PM, three shares of stock A were traded at Rs 10. At 2:45 PM, five shares of stock A were traded at Rs 20. No more shares are traded until the market closes at 3:30 PM.
In this case, the closing price and last trading price will be Rs 20.
Why is closing price important?
If you are a market watcher, the closing price is as essential for you as the opening price, which is the price at which the stock opens in the market.
The closing price of a stock is a reference point for you to understand how a share behaves. You can study the closing price of price over some time, such as a month or even a year. Doing so will help you determine how well the stock has done over time and make an informed investment decision.
The closing price of stocks is essential not just to investors. Financial institutions also observe closing prices and make policy decisions. If you are planning to diversify your investment portfolio, learn to analyse the closing price and reap the rewards.