The reason for this phenomenon is the order imbalance. More often than not, we see stock gaps up or down on the chart. A gap on the chart refer to a 'hole' in the price action from one day to the next. On the upside, a gap-up starts with a significant increase in price at the opening bell. Throughout the trading day, price of the stock stays relatively close to open price or go higher and finish the day that way.
The same is applied to the a gap-down when the price action reflects on the downside. Market is trading hours before and after its opening and closing. The time period varies from exchange to exchange. However, what could happen in those time are pretty much the same. Company could announce earning or bankruptcy. Unexpected news could break-out that will influence the official trading hours.
Let's say company A announces an unexpectedly massive earning in the pre-trading hour. There is likely to have a large wave of buying order coming in the exchange. Since it is completely out of the blue, it suddenly creates an order imbalance. The buys outweighs the sells orders.
In order to meet the demand, the market maker will start to raise the price of the stock gradually. They will keep doing this until the price is attractive enough for someone to sell his stocks. Earning is just one example. It could be also because people wants the stock so badly after the market close for some reasons. A flood of buy order comes in in the after-hour trading and the market-makers will have take action on it.
The same holds true to a gap-down. On this side of the coin, it could be a bad news coming out. Bad earning or unexpected event took place like the Sep-11th. People go into panic mood and start dumping their stocks creating order imbalance. The market maker then have to lower the stock price to the point it is cheap enough for somebody to want the stock.
It is said that to be able to push the price up or down in the pre-hour trading session, the market makers have to use some of their own money. At some points in time, they will have to take down or push up the price of the stock to bridge the gap and cover their own positions. It is unverified and official but the point is: Gaps get filled.
My name is Richard M Le. I am passionate about Trading & Investing and sharing with you what I know in the stock options market. If you want to learn more about Online Options Trading, please visit my site at: http://ioptionstrading.net
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