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.
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?
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.)
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.
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.
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protected by Chris W. Rea Jun 27 at 14:18
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