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At 7 a.m., it can be the time for a morning coffee while 8 p.m. can be time to have supper, watch your favorite television shows, or even enjoy a glass of wine.
If you have a Robinhood account, it’s also becoming a time to play the stock market during extended trading hours — but is that time well spent?
The brokerage platform geared to novice retail investors said Tuesday that it’s launching extended trading hours from 7 a.m. to 8 p.m., Eastern Time.
Robinhood users are “juggling a lot, from full-time jobs to school, families and side gigs,” the company said in a Tuesday blog post. “Our new extended trading hours for equities will give them more opportunities to manage their portfolio at a convenient time for them, whether that’s in the early morning or in the evening.”
“‘The volume of trading in the after-hours market is a fraction of what it is during the general market hours. This can lead to significant price distortions.’”
Robinhood HOOD, -6.00% already offered trading at 9 a.m., before the 9:30 a.m. opening bell, as well as after-hours trading from 4 p.m. to 6 p.m.
The capacity to buy and sell from 7 a.m. to 8 p.m. is happening now and all users should be able to do it in the coming weeks, a spokesman said.
Other brokerage platforms already enable extended hours stock market trading, such as Fidelity Investments and Charles Schwab SCHW, -0.90%. And the cryptocurrency market never sleeps — including on platforms like Robinhood.
Investing and trading is never easy at any time of the day. But because Robinhood has decided to keep the lights on earlier and later, financial advisers say you need to clearly see the risks that accompany extended trading hours for stocks.
Here’s a quick field guide on what to take into consideration if you’re skipping the morning coffee or lengthy dinner to buy and sell.
1. Don’t be glamoured by warped prices
Before and after official stock-market trading hours, there may be fewer buyers and sellers in the market. If price is the outcome of supply and demand, that may warp a share price during this point in time.
“The volume of trading in the after-hours market is a fraction of what it is during the general market hours. This can lead to significant price distortions,” said Mike Hunsberger, owner of Next Mission Financial Planning in St. Charles, Mo.
“Individual investors are likely to pay too high prices and sell too low during after-hours trading,” said Curtis Diaz, president of Great Blue Financial in Tampa, Fla. “The spread between bid and ask widens, as there are much fewer buyers and sellers.”
So here’s how to set guardrails: Use limit orders, multiple advisers emphasized. Limit orders are instructions “to buy or sell a stock at a specific price or better,” the Securities and Exchange Commission explained. A buy limit order is only carried out at the limit price or a point below, the SEC said. A sell limit order is done at the limit price or higher.
“‘Individual investors are likely to pay too high prices and sell too low during after-hours trading.’”
These orders do not guarantee execution, the SEC noted. But in the case of extended trading, advisers said setting these limit-order ceilings and floors might protect someone from a raw deal.
Limit orders are a must, according to Steve Zakelj of Flatirons Wealth Management in Boulder, Colo. “The trading is almost always extremely thin so market orders could get executed at prices 10%-20% away from the current spot price as other traders will put their own buy and sell limit orders at ‘fantasy’ prices just hoping some new trader comes along and mistakenly enters a market order.”
In a help section on its website, Robinhood warns that extended hours trading can be volatile and risky. Market orders made during extended hours “are converted to limit orders with a limit price set at 5% away from the last trade price at the time the order was entered,” the company said. For a buy order “the limit price is set at 5% higher than the last trade price” while a sell order sets the limit price “at 5% lower than the last trade price.”
If the market price stays above the limit price for a buy, or lower than the limit for a sell, Robinhood said “the order will remain pending and cancel at the end of the after-hours session.”
2. Don’t make any knee-jerk moves
Sure, this applies at all times, but it’s especially the case before and after hours. If market-moving information pops during regular hours there are more people digesting the news and reacting. Hot trading without a broader market read on the news might leave early birds and night owls in the dust.
Many company earnings reports typically hit during extended hours, noted Chao Zhang, managing member and chief investment officer at Think Different Wealth Advisors. A stock price can “often have knee-jerk reactions to earnings releases (largely based on headline beat/miss numbers) that may not be correct,” Zhang noted.
When there’s more time to read the nuance, like future guidance, the share “can often trade significantly differently,” Zhang said.
“Extended trading can open up chances for retail investors to take advantage of big price moves, but that comes with a risk.”
Need an example? Zhang pointed to the trading story surrounding Dave & Buster’s Entertainment PLAY, +2.91%. Shares dropped 9% in the extended session Monday after quarterly results missed analyst expectations, Zhang noted. Now that investors had time to read through the guidance and listen to the management call, the stock swung up. Company shares are up nearly 15% in afternoon trading from the start of trading Tuesday morning.
Extended trading can have upsides, opening up chances for retail investors to take advantage of big price moves, said Jeff Burke, founder of 7th Street Financial in Eden Prairie, Minn. Still, they need to know the downsides too — especially during earnings season.
“Sometimes that big initial move sticks and other times the market processes the information further through the day and that big initial move is largely erased. You might get up in the wrong side of that initial move,” Burke said.
3. Don’t be oblivious to your competition
On the point about fewer players trading in the extended hours, it’s worth noting who else is sticking around. It’s likely a lot of people and financial firms whose full-time job is trading, advisers said.
“During times of low market liquidity,” the retail investors who have stuck around for extended trading “are many times playing against the giants or professionals that have resources and time to trade much more effectively during these hours,” said Erik Baskin of Baskin Financial Planning in Dayton, Ohio.
“During off-market hours, retails investors should beware of ‘low liquidity, lack of experience, and uncertainty around market reactions to press releases.’”
The night time isn’t the right time for Robinhood users to be trading in Baskin’s view “due to low liquidity, lack of experience, and uncertainty around market reactions to press releases.”
Robinhood’s stock jumped Tuesday on the news of the extended hours trading capabilities. Robinhood shares were down almost 9% year to date, while the Dow Jones Industrial Average DJIA, -0.12% was down approximately 3% and the S&P 500 SPX, -0.27% was down 3%.
Source: This post first appeared on http://marketwatch.com/