Last Updated on 21 September, 2020 by Therobusttrader
New investors may not be fully aware of the dynamics of the stock market. It is important to know when it is possible for you to exit your positions and sell your stocks. On top of that, it is important to know how liquidity might affect the way your stocks are sold.
You can only sell stocks when the stock exchange is open, or during the pre-market or after-hours. However, it is best to sell during the exchange hours due to additional risks during after-hours trading.
How Buying and Selling Works on the Exchange
Let’s take a look at how a stock is sold on the market. Before we delve into the timing element of the stock market, we must take a look at the actual process of selling and purchasing stocks on the market along with things you need to look out for when selling a stock.
How a Stock is Sold
When you first purchase a stock, there is a seller on the other end that is selling the stock to you. Similarly, your broker needs to first find a buyer who is willing to purchase the stock that you are selling. The investor on the other end needs to agree on the price that you have stated.
While it may seem like a complicated process to find buyers for a specific stock, the actual process is extremely simple. This is because all the buyers and sellers are linked to one another through something called the ‘Stock Exchange’.
The Stock Exchange
Simply put, the stock exchange is a market where stocks are bought and sold. During the early days of stock trading, trading was done at a physical location. Those who were selling the stocks shouted the stock and its price. Those who wanted to purchase the stock and were satisfied with the price flocked to the seller to purchase it.
This process was gradually normalized and a little bit of order was brought to the exchange. However, all that is irrelevant. What you need to know is this: Over the last few decades, pretty much every single stock exchange in the world has been revamped to operate electronically. Nowadays, the internet is used to trade on the exchange.
The stock exchange is a great place because it allows you to trade most stocks very quickly. Of course, this can only happen if you are willing to sell your stocks at the current market price. In some cases, the stocks suffer from low liquidity which brings its own problems.
How Liquidity of a Stock Affects its Sale
Simply put, liquidity is a measure of how easy it is to convert stock into cash. While a large portion of the stocks listed on both the NASDAQ and NYSE are quite liquid, there are some stocks that suffer from low liquidity. If you did purchase a stock that is not very liquid and now you want to sell it, you could suffer from excessive ‘slippage’.
Slippage occurs when the actual price at which a stock is sold varies from the expected price. Slippage can both lead to a positive outcome or a negative outcome. However, one of the first rules of investing is that you try to have as little deviation from your expectations as possible, so as to better predict your returns and have a benchmark to compare your actual returns against. Slippage occurs in illiquid stocks quite often because of volatility in the market price of the stock (due to a low number of traders).
Stocks with low liquidity can occasionally present fantastic opportunities. That could be because many institutions and other investors ignore fantastic companies due to their low liquidity. This can cause some companies to become undervalued over time and suddenly experience huge upticks. Stocks with low liquidity also sometimes offer opportunities for daytraders as breaking news relating to them can cause a huge trend to begin(in either direction).
However, stocks with low liquidity are risky, and the prospect of slippage should never be ignored.
Over the Counter Markets
It is also possible to trade stocks in OTC markets. OTC markets are dealer networks where individuals/institutions sell or purchase stocks directly from one another without the aid of an exchange.
However, most of the stocks traded on OTC markets are penny stocks. Penny stocks are quite risky, and a hunting ground for scammers. As such, most new investors should try and stay away from penny stocks as much as possible.
When Can You Sell a Stock?
You can sell stock during the same hours that you can purchase one. Essentially, you can either sell stock during the normal exchange hours or during after-hours or pre-market trading. Let’s take a look at both of them.
Normal Exchange Hours
The best course of action is to sell your stock during the normal exchange hours. This is because stocks experience the highest liquidity during this time and it is less probable that you experience excessive slippage.
The two exchanges currently operating in the United States are the New York Stock Exchange (NYSE) and NASDAQ. Both of the exchanges are operational every single week from Monday to Friday. However, there are a few days throughout the year when the stock exchange is either completely closed or it shuts down early.
You can take a look at both the NASDAQ Holidays as well as the NYSE Holidays to see on which days the exchanges will not be open. Generally, the schedule for the exchange is decided a few years in advance to make sure that traders are fully aware of when the exchange will be open.
As for the standard market hours, both of the exchanges open at 9:30 a.m. ET and close at 4:00 p.m. ET However, this is not the only time that you can trade. It is also possible for you to trade before the exchange opens and after it closes.
The After-Hours Market
The after-hours Market began once the technology was there to support such an endeavor. The after-hours market allows traders to capitalize on new developments which surface once the exchange has closed. On top of that, the after-hours market also facilitates time-constrained traders who cannot afford to trade during the standard trading hours.
The NYSE’s pre-market trading begins at 7:00 a.m. ET and goes on till 9:30 a.m. ET Once the exchange closes, the after-hours trading begins at 4:00 p.m. ET and goes on till 8:00 p.m. ET
You have more time to trade on NASDAQ than you do on NYSE. The pre-market trading opens at 4:00 a.m. ET and stays open until the exchange officially opens at 9:30 a.m. Once the trading hours are over, the after-hours trading begins. The after-hours market opens at 4:00 p.m. ET and stays open until 8:00 p.m. ET just like NYSE.
After-hours trading has both positives and negatives. The positives include being able to react to new developments and having the freedom to trade when you want. The negatives include low liquidity and large spreads. The Robust Trader has a detailed article on After-Hours Trading that you can take a look at to understand how it works and whether or not it is meant for you.
You can sell your stocks either during the standard market hours or during after-hours trading. However, there are other things that you need to be aware of. These include the liquidity of the stock which can lead to slippage as well as understanding the dynamics of how stock trading works.
While you can trade during the standard exchange time and the after-hours, it is definitely worth it for you to understand how the after-hours market works before you start trading on it. It can be difficult for new investors to fully capitalize off of after-hours trading, which is why you should be careful not to take unnecessary risks if you do engage in after-hours trading.
If you enjoyed this article you might also like our other articles answering common questions traders have!