What it means
Markets close each day, and the last price recorded at the end of trading becomes the previous close the following morning. Financial websites and trading screens use it to calculate the daily price change in dollars and in percentage terms.
When you see a share described as up 2% today, that is measured against the previous close. The number is more useful than it first appears.
Traders use it to judge whether a stock opens higher or lower than the day before, which is called a gap. A large gap after overnight news can indicate strong buying or selling interest.
The previous close is normally the official closing price published by the exchange. Some exchanges determine it through a closing auction, which gathers buy and sell orders to set a single price at the end of the day.
Others use the last trade or an average of the final trades, so the method can differ. For investors and finance teams, it is the standard way to value a portfolio at the end of each day.
Funds use closing prices to calculate their net asset value, and companies use them to work out the value of share-based pay at a given date. Using a consistent source for the figure keeps reporting reliable.
There are a few nuances. If a company pays a dividend or splits its shares, the previous close may be adjusted so that comparisons remain fair.
Prices in after-hours trading are not part of the close, so a share can look very different in the morning even though the previous close has not changed. Finally, a stock that did not trade at all on the previous day usually shows the last available closing price.
Check the date shown beside the figure, particularly for thinly traded securities, because an old price can be misleading. Professionals also compare the figure with the bid and ask quotes to see where the market is now.
In practice
Real-world examples.
Example
A fund manager checks the screen at the start of the day and sees that a bank's share price opened 4% below the previous close after a profit warning. She decides whether to cut the holding. The previous close is her yardstick for how bad the reaction is. She compares the drop with similar past events before deciding.
Example
A finance team values 20,000 employee share options at the previous close of $8.50 on the last day of the quarter. They use the same source each quarter for consistency. The auditors can then trace the figure to the exchange record. This avoids arguments about which price source was used.
Example
A day trader sees a technology stock priced $3.00 above the previous close before the market opens. The rise is on news of a contract win, so she studies the order book before trading. She sets a limit order at a price she is comfortable with. She also notes the previous close so that she can measure the gap once trading begins.
Formula
Calculation
Price change = current price - previous close; percentage change = price change / previous close x 100%.
A share closed yesterday at $50.00 and is trading today at $51.50. The price change is $51.50 - $50.00 = $1.50. The percentage change is $1.50 / $50.00 = 0.03, or 3%. An investor holding 400 shares has gained 400 x $1.50 = $600 on the day.Case study
Seen in the real world.
Cedar Lane Foods is a fictional listed company used for illustration. Its shares closed at $24.00 on a Monday.
Overnight, a competitor announced a takeover offer for Cedar Lane at $30.00 a share. The next morning the shares opened at $28.80, a gap of $4.80 above the previous close.
The illustrative finance director used the previous close to explain to the board that the market was pricing in a 20% rise, below the offer of 25%, which suggested investors saw some risk of the deal failing.
Watch out
Common mistakes.
- Confusing the previous close with the opening price. The open is the first trade of today, and it may differ from the previous close.
- Ignoring adjustments for dividends or splits. These can change the reference price used for comparisons.
- Relying on an old previous close for a rarely traded security. The price may not reflect current value.
Questions
People also ask.
How is the closing price determined?
Many exchanges use a closing auction, while others take the last trade or an average of the final trades.
Is after-hours trading included in the previous close?
No, the close is usually set at the end of the regular session. Extended-hours trades are reported separately and often have thinner volume.
Why do platforms show the previous close?
It is the baseline for the day's price change in dollars and percentage terms. Without a fixed reference, the daily move could not be compared across shares.
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