7am may be time for morning coffee, while 8pm may be time to have dinner, watch your favorite TV shows or even enjoy a glass of wine.
If you have a Robinhood account, it’s also time to play during the stock market’s extended trading hours – but is that time well spent?
The brokerage platform, which caters to new investors, announced on Tuesday that it is introducing extended trading hours from 7 a.m. to 8 p.m. Eastern time.
Robinhood users “juggle a lot, from full-time jobs to school, families and side hustles,” the company said in a Tuesday blog post. “Our new extended trading hours for equities give them more opportunities to manage their portfolio at a time that is convenient for them, be it early morning or evening.”
“Trading volume in the after-hours market is a fraction of what it is during general market hours. This can lead to significant price distortions.’”
– Mike Hunsberger, owner of Next Mission Financial Planning in St. Charles, Mo.
Robinhood HOOD, +24.20% was already offering 9:00 trading before the 9:30 opening bell and after hours trading from 16:00 to 18:00
The ability to buy and sell from 7am to 8pm is happening now and all users should be able to do so in the coming weeks, a spokesman said.
Other brokerage platforms are already allowing exchange trading at extended times, such as Fidelity Investments and Charles Schwab SCHW, -0.63%. And the cryptocurrency market never sleeps – even on platforms like Robinhood.
Investing and trading is not easy at any time of the day. But if Robinhood has decided to leave the lights on earlier and later, financial advisors need to see clearly the risks that come with extended trading hours for stocks.
Here’s a quick guide on what to consider when you’re skipping that morning coffee or that late dinner to buy and sell.
1. Use order limits
There may be fewer buyers and sellers in the market before and after the official exchange trading hours. If the price is the result of supply and demand, it can skew a stock price at that point.
“Trading volume in the after-hours market is a fraction of what it is during general market hours. This can create significant price distortions,” said Mike Hunsberger, owner of Next Mission Financial Planning in St. Charles, Mo.
“Individual investors are likely to overprice and undersell during after-hours trading,” said Curtis Diaz, president of Great Blue Financial in Tampa, Fla. “The spread between the bid and ask prices is getting wider because there are far fewer buyers and sellers.”
How to set guard rails: Use limit orders, several advisors emphasized. Limit orders are instructions “to buy or sell a stock at a certain price or better,” according to the Securities and Exchange Commission. A buy limit order will only be filled at the limit price or a point below, the SEC said. A sell limit order is executed at the limit price or higher.
“‘Individual investors are likely to overpay and undersell during after-hours trading.'”
– Curtis Diaz, President of Great Blue Financial in Tampa, Fla.
These orders do not guarantee execution, the SEC noted. But in the case of extended trading, the advisors said setting these limit order caps and floors could protect someone from a raw trade.
Limit orders are a must, according to Steve Zakelj of Flatirons Wealth Management in Boulder, Colorado. “Trading is almost always extremely thin so market orders could be filled at prices 10% to 20% off the current spot price as other traders are doing their own buy and sell limit orders to “fantasy” -place prices just hoping a new trader will come along and mistakenly enter a market order.”
In a help section on its website, Robinhood warns that trading can be volatile and risky for long periods of time. Market orders placed during extended business hours “will convert to limit orders with a limit price that is 5% from the last trade price at the time of order entry,” 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 to buy or below the limit to sell, Robinhood said, “The order will remain pending and will be canceled at the end of the after-hours session.”
2. Avoid the knee jerk movements
Sure, that applies at all times, but especially before and after work. When market-moving information emerges during normal business hours, there are more people digesting and acting on the news. Hot trading without a broader market situation in the news could desert early risers and night owls.
Many company earnings reports tend to be produced during extended business hours, noted Chao Zhang, executive director and chief investment officer at Think Different Wealth Advisors. A stock price can “often have a knee-jerk reaction to earnings releases (mainly based on beat/miss scores) that may not be accurate,” Zhang noted.
If there is more time to read the nuances, such as B. future projections, “the stock can often trade significantly differently,” Zhang said.
“Extended trading may present opportunities for retail investors to profit from large price movements, but that comes with a risk.”
Need an example? Zhang pointed to the trading story surrounding Dave & Buster’s Entertainment PLAY, +14.87%. Shares fell 9% in Monday’s extended session after quarterly results missed analysts’ expectations, Zhang noted. Now that investors have had time to read through the guidance and listen to management’s call, the stock has surged. Shares of the company are up nearly 15% in afternoon trade since the start of Tuesday morning trading.
Expanded trading can have benefits and give retail investors opportunities to take advantage of large price moves, said Jeff Burke, founder of 7th Street Financial in Eden Prairie, Minnesota. Still, they must also understand the downsides — especially during earnings season.
“Sometimes that big initial move gets stuck and other times the market continues to process the information throughout the day and that big initial move gets mostly erased. You could get up on the wrong side on that first move,” Burke said.
3. Know who you are dealing with
To the point that fewer players are trading in the extended hours, it’s worth noting who else is there. There are likely many people and financial firms whose full-time job is trading, advisers said.
“During periods of low market liquidity,” the retail investors who have stayed around for longer trading, “often play against the giants or professionals who have the resources and time to trade much more effectively during those hours,” said Erik Baskin of Baskin Financial Planning in Dayton, Ohio.
“During trading hours, retail investors should be aware of ‘low liquidity, lack of experience and uncertainty related to market reactions to news releases’.”
— Erik Baskin of Baskin Financial Planning in Dayton, Ohio
Night time is not the right time for Robinhood users to trade, according to Baskin, “due to low liquidity, lack of experience and uncertainty regarding market reactions to news releases.”
Robinhood shares rose Tuesday on news of extended trading hours. Robinhood shares are down nearly 9% year-to-date, while the Dow Jones Industrial Average DJIA is down about 3% at +0.97% and the S&P 500 SPX is down 3% at +1.23%.