I was wondering if it is unwise to place orders for stocks/ETFs before the market opens. I am almost always buying to add more to existing positions. I don't have any time during the day to make trades, so I usually put in my orders the night before.
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7Since a single individual investor almost certainly doesn't have the experience or luck to consistently time the orders during the trading day, and since it sounds like you may be holding securities for the longer run (as opposed to just day trading), you shouldn't have a problem.– John BensinCommented Apr 12, 2013 at 14:08
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1No it is not foolish to place orders before the market opens, it is actually very wise to do so.– VictorCommented Apr 12, 2013 at 23:07
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@victor, unless the news of the night prior has his stock open on a pop, then settle down. See my response, a $1 drop from opening pop.– JTP - Apologise to Monica ♦Commented May 3, 2013 at 3:28
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@JoeTaxpayer - you should include how you will enter stocks in your trading plan. If one cannot be in front of the screen for the first hour or 2 of the day, then the best option is to do their analysis and place a market order the night before . Remember, as a long term investor you should not be worried about daily fluctuations.– VictorCommented May 3, 2013 at 4:07
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@victor - I'd say the warning to avoid a purchase on big news is all I can offer if he cannot get to a computer. The fact that I commented and ran into the exact situation for a stock I held within two weeks is a hint this is not rare.– JTP - Apologise to Monica ♦Commented May 3, 2013 at 5:06
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6 Answers
If you are in it for the long run and are not worried about intra day fluctuations and buying within + or - 1% you would be better off going for a market order as this will make sure you buy it on the day.
If you use limit orders you risk missing out on the order if prices gap and start rising in the morning.
Another option is to employ stop buy trigger orders (if offered by your broker).
So you would have to sum up and decide which type of order would suit your strategy the best. Are you looking to buy the security because you are looking for long term growth and gains, or are you after getting the best price possible to help your short term gains?
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I am looking for long term growth. I use limit orders out of concern that a large upward movement will make the trade too expensive. I do not hold much cash in my account.– mushroomCommented Apr 13, 2013 at 0:34
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@mushroom - then you will have to be willing to miss the trade altogether if the price gaps up and keeps going up. That is a choice you will have to make. Whatever you do chose to do, always be consistent with it, write it down on paper as part of your approach (strategy) of how you will place your orders when you buy and sell securities.– VictorCommented Apr 13, 2013 at 0:57
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2@Victor: well, that's what the limit is for, isn't it: saying "if it's more than x, I don't want to buy it" Commented May 7, 2018 at 22:07
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A high limit order (e.g. closing price + 1%) is better than a market order. With a market order, you could still execute at +5% or +10% for it to come back down only a few minutes later. Is that what you really want?– xirtCommented May 9, 2018 at 15:55
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@xirt - the OP wants to buy the stock/ETF but does not have the time to watch the screen all day. So a market order will guarantee the purchase a limit order, even one placed above overnight close, will not. A better option in my opinion would be to place a stop buy order as this will only make a purchase if price moves above a certain level. You buy a stock moving up, not chase one on the way down.– VictorCommented May 9, 2018 at 20:36
This is an old question, but I had the same question and it still goes up high in Google searches.
I found two sources online with the same option:
From Charles Schwab Best practices for trading ETFs
Markets can be unpredictable very early and very late in the day. It’s not unusual to have a rush of orders at the open or close, which can lead to bigger than normal ups and downs in prices. These short-term swings make it more likely that you may end up buying an ETF at a premium (a price higher than the true value of the underlying stocks or bonds) or selling at a discount, so we recommend trying to avoid trading during the first and last 30 minutes of each trading day.
Vanguard Best practices' for ETF Trading
Beware of the open and close. An ETF investor should consider allowing some time to pass before trading in the morning, and also avoid waiting until the last minute to wrap up buy or sell orders in the afternoon. After the market opens, not all of an ETF’s underlying securities may have started trading. The market maker then cannot price the ETF as precisely, potentially leading to wider bid-ask spreads. As the underlying market’s close nears, an ETF may experience wider spreads and more volatility as market participants begin to limit their risk, leading to fewer firms “making markets” (i.e., supporting the ability to buy or sell a particular security at the quoted bid and ask price) in an ETF.
This would otherwise be a comment, but I wish to share an image. A stock I happened to own, gapped up on the open to $9.20 and slowly worked its way down to $8.19 where it closed up 6% but near its low for the day.
This is an addendum to my comment above, warning about buying a stock on the open when news is coming out. Or more important, to be mindful of that news and the impact it might have on the stock. In this case, when the news came out and the stock had closed at $7.73, one would need to decide if he wished to buy it at any cost, or place a limit order. I've redacted the name of the company, as this discussion has nothing to do with any particular stock, I'm just offering an example of the effect I warned about, three weeks ago. (Full disclosure, I got out at $8.70 in the first minutes of trading.)
answered May 2, 2013 at 1:00
JTP - Apologise to Monica♦JTP - Apologise to Monica
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Depending on your strategy, it could be though there is also something to be said for what kind of order are you placing: Market, limit or otherwise?
Something else to consider is whether or not there is some major news that could cause the stock/ETF to gap at the open. For example, if a company announces strong earnings then it is possible for the stock to open higher than it did the previous day and so a market order may not to take into account that the stock may jump a bit compared to the previous close. Limit orders can be useful to put a cap on how much you'll pay for a stock though the key would be to factor this into your strategy of when do you buy.
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1+1 - "major news" - I recently wished to buy a stock that had news the night before. It opened up, and I waited to buy till about 11:30 when the volume settled down. The fill was 30 cents lower than the open, so $300 (it was an $8 stock, fyi) saved on the 1000 shares we bought. I'd recommend the OP find an internet connection during lunch hours, although most days won't have such an opening pop. Commented Apr 12, 2013 at 15:58
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@JoeTaxpayer, so what happens if by 1:00pm the price dropped another 30 cents?– VictorCommented Apr 12, 2013 at 23:02
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1@Victor - the fact that I bought it better than a "buy at open" doesn't change. What you want to know is what if it kept rising, and never went below the up-50 cent open. Good question. In that case, I'd have passed on the buy and waited. My unsubstantiated experience is the open-up or open down is often an over reaction. Commented Apr 12, 2013 at 23:40
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@JoeTaxpayer - no what I want to know is if it continued going down after you bought it or did it go up? My experience is that if you keep trying to chase the price on an intra-day timeframe you will get it wrong at least 7 to 8 times out of 10 but will always remember the couple of times you got right!– VictorCommented Apr 12, 2013 at 23:51
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@Victor, I see. It went down during the day, I did not catch the bottom, it then came back and closed five cents below what I paid. I don't know if there's been any data gathered, it would be interesting to see what stocks that opened say 5% up, did the rest of the day. Commented Apr 13, 2013 at 1:49
More on a technical note, but the spread on an ETF tends to be worst at market open and near market close. (assuming the ETF constituents are traded on a synchronous basis.)
If possible, it's often best to let market makers get up and running before allowing your order to flow into market.
I do the same thing for the same reasons, except that I never use a Market Order.
The Market Order Problem
When you send a market order to your broker, you are saying "I want to by X number of shares at any price". The problem is that the price you receive will not be the best price around. Your broker likely receives money to send the order through firms that direct the orders to affiliated market makers who open first but have wide spreads ("payment for order flow" aka "customer priority").
The Opening Problem
The open is the time that securities are first available for trading.
It is also the moment that the exchange may have started running new software... which may or may not have problems.
As market makers don't know which way the market is going to go, and the risk of technical problems, they often start off with wide spreads (a larger difference between the bid and ask price) and gradually narrow their spreads.
As a result, the first price of the day may be from a market maker quoting at the maximum legal quote width. As a result, you are less likely to get the best price.
The Closing Problem
Some instruments are hedged using other securities. For example, options are often hedged with underlying stock, and ETFs may be hedged with the constituent components. If the instrument that is going to be used as a hedge is going to close, then if one was selling an option or ETF that would need to be hedged, it wouldn't make sense to continue offering it all the way to the market close, as if one did a trade, there wouldn't be time to hedge it. As a result, market makers tend to widen their quotes or cease quoting prior to the close.
The Closing Auction
There are however some liquidity mechanisms, such as the "Closing Auction" that occurs on primary markets. As a lot of mutual funds have to buy and sell securities based on the closing price of a security, and option market makers have to worry about being assigned if the security is within a particular price range, there is a fair amount of liquidity in the closing auction. If you can get your order in for the closing auction (depending on the order types your broker provides), that may give you the opportunity to buy or sell at the official closing price. The close can be subject to some sudden swings as day trader's intra-day margin finishes and they have to close out positions. I would still recommend that even if you submit an order to the closing auction that the order still be a limit order.
The Limit Order
The Limit Order is your friend. Set the price to one that you think is reasonable. If you are really keen to have your trade go off, increase the price of your limit order (that is still better than a market order). If you can be patient, use a "good-til-cancelled" order type - your order can sit in the book for a number of days - sometimes up to a year, depending on your broker.
If you don't need to open the entire position straight away, you can use a "scale" - a stack of limit orders at different prices.
If your broker charges "per trade" rather than "per share", change to one that does, or factor in the commissions you will pay when you plan your trade.
