What is Net Change?

What is Net Change?

Net change is the difference between a prior trading period’s closing price and the current trading period’s closing price for a given security. For stock prices, net change is most commonly referring to a daily time frame, so the net change can be positive or negative for the given day in question.

Though the net change for stocks and most securities is quoted in U.S. Dollars when reported by financial media, the net change can be calculated and quoted in any denomination depending on what is being traded.

Formula to Calculate Net Change

Net change = Current period’s closing price – Previous period’s closing price

Also, in percentage terms, the formula is:

Net change (%) = [(current period’s closing price – previous period’s closing price) / previous period’s closing price] * 100

Here,

Current period’s closing prices = closing price at the end of the period when the analysis is done.

Previous period’s closing price = price at the beginning of the period for which analysis is to be done.

How Does Net Change Work?

In fundamental analysis, net change is used to analyze stock prices and can be either positive or negative.

Let’s assume that the stock of Company XYZ closed at $5 per share yesterday. Today, it closed at $5.75. The net change is $0.75. Often the net change includes a + or – sign to make the direction of the change clear.

Net change in shares trading

While it can be used in a range of markets, net change is most commonly used in share trading. Traders will often use net change to assess the daily deviations in a stock’s price. They will then use this information to determine if they should open a long or short position – which would depend on whether the net change has been positive or negative.

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Net change can also help a trader decide if they should close their active positions, as it can help assess which way the markets might move during the current trading session.

Use of Net Change in Technical Analysis

Net change is very important in technical analysis. Technical analysis is a trading philosophy and strategy that is utilized to evaluate and identify trading opportunities based on historical statistical data gathered from trading history.

It refers to attempting to evaluate a security based on its historical price movements and volume trends. It is in contrast to fundamental analysis, which is focused on evaluating securities based on the underlying business results, such as earnings.

As mentioned, technical analysis makes use of the price history of assets in order to evaluate securities. Therefore, the net change in price is very important within the discipline. Net change is often represented in various stock charts. Some examples are:

  • Line chart
  • Bar chart
  • OHLC (open-high-low-close) chart
  • Candlestick chart
  • Mountain chart
  • Point-and-figure chart

Technical analysis traders utilize the charts to identify trends in prices and volume. By analyzing the historical trends, the traders will forecast where the directional patterns will lead to in the future.

Net change represented in charts allows such traders to identify patterns during periods of time that they believe will eventually lead to a certain price target.