One of the most intriguing questions investors have is what is the best time to buy stocks, and it has long been commonly believed that the morning is the best time to buy stocks. But do stocks always go up in the morning? What drives stock prices higher shortly after the opening bell?
In this article, we will explain exactly why stocks tend to go up in the morning, as well as the reasons behind it and how investors can take advantage of this.
Why the morning is the best time for stocks
It has long been accepted by most investors, and finance professionals that the morning period is the best time of the day to buy stocks. So much so, that some trading and investing strategies like the buy the close sell the open rely on this notion that stocks are expected to perform better in the morning, or when markets open than when they close.
But what exactly is driving stock prices higher in the morning?
Researchers at the NY FED have analyzed the performance of stocks throughout different times of the day, which has shown that the time of the day where stocks perform better is between 2 a.m. and 3 a.m. Eastern Time (ET). But what exactly is driving stock returns at 2 a.m. in the morning? Do you need to stay up all night and trade after hours?
The main reason why most of the stock returns are generated around this time is due to foreign investors mainly European. At 2 a.m. ET, it is 8 a.m. in Berlin and Paris, and 7 a.m. in London. Asset managers and investors allocate a lot of capital during that time, and they are foreign investors are actually the main contributor to stock returns.
Additionally, most companies release their earnings results after the market closes. Since the average company tends to beat estimates stocks are also expected to move higher not only after-hours but also right after the market opens.
We can also see the effect of the opening bell, which allows investors to be able to trade without any restrictions. This also contributes to higher stock prices, and the best time to sell stocks is right after the opening bell. As both institutional and retail investors start trading and taking positions early in the morning.
This explains exactly why stocks tend to go up right after the opening bell, and why most pre-market trading actually allows you to predict higher stock prices in the average stock.
This is also reflected when we compare the S&P 500 performance during the trading hours, after-hours, and pre-market. We can also that using a buying the open and selling the close strategy, will on average generate a loss over the long term.
In fact, if we just compare the returns during the regular trading hours, and after-hours and pre-market we actually see that the S&P 500 is expected to decline during the regular trading hours.
What time of day are stock prices lowest?
Based on the study conducted by the NY FED, the period between 18 p.m. and 20 p.m. Eastern Time is the period where stocks are the lowest. In fact, it is one of the few periods of the day where the average expected return is negative. This means that you should avoid selling stocks after-hours during this time, and you should, in fact, try to buy stocks and take advantage of the lower prices.
What time of day are stock prices highest?
The period between 8 a.m. and 10 a.m. marks the time of the day when stocks are at their highest price. On average this is the best time of the day to sell stocks, and you should also avoid buying around this time.
Is it better to buy stock in the morning or afternoon?
Research has shown that stock prices tend to be the lowest r after the market closes, between 18 p.m. and 20 p.m. This is one of the reasons it is actually profitable to buy stocks after-hours between that time frame, and to sell them early in the morning, either on pre-market trading or right after the market opens.
What time in the morning should you buy stocks?
On average the best time during the morning to buy stocks is during pre-market because over the long-term stocks are expected to decline during the regular trading hours. However, buying stocks pre-market comes with plenty of risks, including lower liquidity, and your broker might not be able to execute your orders.
Additionally, you should also avoid buying illiquid stocks during pre-market, because it will be difficult to execute your orders. It is also important to use limit orders when you are trading during pre-market and after-hours.
Even with all of these considerations, research has shown that buying stocks when the market is closing and between 18 p.m. and 20 p.m. is the best approach because stock returns during that time of the day are actually negative over the long term.
Do stocks go down at the end of the day?
Research has shown that stock prices tend to go down on average during the trading day, and over the long term if you buy and sell stocks at the opening bell, and sell before the market closing you will most likely lose money.
Conclusion
While not every trader and investor is able to stay up all night trading, the research suggests that there is where the alpha is. If you are willing to commit and try to invest during this time, it might be profitable to buy stocks after-hours between 18 p.m. and 20 p.m. ET, and sell them right after the market opens before 10 a.m.
Investors should also keep in mind that these studies and research are based on the average stock, and every company will be affected by different news, so although in theory, you could create a trading strategy to backtest this data, it will not work unless you are trading an index like the S&P 500 or a basket of stocks.
