In Finance, what is a Previous Close?
In finance, a previous close is a term that is used to refer to the price of a security before the close of the last market. For example, the last price at which a certain stock was traded on a Monday would be referred to as the previous close until the market reopened on Tuesday morning. Additionally, the price at which a stock was traded on a Friday before the closing bell would be the previous close until the market reopened on Monday morning. A previous close does not only refer to the price of stocks. It applies to other kinds of securities as well including futures, commodities, and bonds.
The previous close is often used as a way to compare the price of a security from one day to the next. Although a security may be traded at a number of prices during the day, the closing price is used in order to make comparisons on a day-to-day business. It is the metric that is used by many financial analysts and financial news programs to discuss the events within a day's stock market and to make preparations for, or even forecasts for, the following day. Drastic shifts in a security's previous close are often closely monitored and speculated on, especially if the security is one that is popular among stock analysts and investors.
Sometimes the previous close is manipulated by investors to make the stock look as though it did better during a given day than it really did. This is done by purchasing a small amount of the security at an artificially high price. As such, the previous close will look artificially high and may attract the attention of other investors, which is called a "high close." In order to create a high close, the security must be purchased at the artificially high price in the very last minutes of trading before the closing bell. Otherwise, another purchase of the security may be made at a more reasonable price, making the previous close on the security closer to the lower range of prices at which it was traded during the course of the entire day.
Securities are still traded after the closing bell. As such a previous close may not reflect what happens after the closing bell. However, it is still used as a helpful metric to discuss the events within a day's market and prepare for the following day.
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