Have you ever wanted to place a trade while the market was technically closed? (Because let’s be honest, the market’s hours of 9:30 am to 4:00 pm EST aren’t particularly convenient for anyone working a 9-to-5.)
Or, have you ever wanted to place a trade on a stock or exchange-traded fund (ETF) that executes as the bell rings the market to open for the day? A market-on-open (“MOO”) order might be your answer. An “MOO” order is one that will execute at the open of the market at the prevailing price.
This is not to be confused with after-hours and pre-hours trading, where trades are actually executed during hours that market exchanges are technically closed.
As you might be catching on, buying or selling a security on an exchange isn’t hard, but it’s also not as simple as clicking a button without a thought as to how it happens.
Even within a relatively easy-to-use online dashboard or trading platform, investors still need to make some decisions about the details of each transaction.
Overview of Market-On-Open Orders
Here’s an overview of market-on-open orders, including some reasons you might want or need to use a market-on-open order, the risks and benefits of a MOO order, and how to place a MOO order if you ultimately decide it’s right for your trade.
A market-on-open order is an order to be executed at the day’s opening price. Just as the name implies, MOO orders are only to be executed when the market opens.
To fully understand how a MOO order works, it may help to first understand both securities exchanges and the different ways that trades can be executed. The latter is generally referred to as an “order type” or “market order.”
Securities exchanges are marketplaces where securities such as stocks, ETFs, and options are bought and sold. In the United States, there are currently fifteen national securities exchanges registered with the SEC, including the New York Stock Exchange, the NASDAQ, and the Chicago Board Options Exchange. Next, order types. Order types can be put into one of two broad categories: market orders and limit orders.
A market order is an order to buy or sell at the best available price at the time. Generally, a market order focuses on speed and will be executed as close to immediately as possible.
But, securities that trade on an exchange experience price fluctuations throughout the day, so the investor may end up with a price that is higher or lower than the last-quoted price.
A limit order is an order to buy or sell a stock at a specific price. A limit order is triggered at the limit price or within $0.25 of it. At the next price, the buy or sell will be executed.
Therefore, limit orders can be made at a designated price, or very close to it. While limit orders do not guarantee execution, they may help ensure that an investor does not pay more than they can (or want to) afford for a particular security.
For example, an investor can indicate that they only want to buy a stock if it hits or drops below $50. If the stock’s price doesn’t reach $50, the order is not filled.
Therefore, a market-on-open order is a specific version of a market order. Because it is a market order, it will happen as close to immediately as possible, and at the open of the market. The order will be filled no matter the opening price of investment.
Beyond market and limit orders, there are many other order types, such as stop orders, stop limit orders, buy stop orders, and so on.
With each order type, the investor is providing specific information on how, and under what circumstances, they would like the order filled. In the world of order types, these are semi-customizable orders with modifications.
A MOO order is not to be confused with after-hours (and sometimes, pre-hours) trading. Some brokerage firms are able to execute trades for investors during the hours immediately following the market closing or prior to the market’s open.
Generally, after-hours trades are done through electronic communication networks (ECNs). Investors can contact their brokerage firm or financial services company of choice to learn more about which types of orders are available for buying and selling. It is possible that some firms may offer order types while others do not.
Investors with something particular in mind may want to shop around between different financial services companies to be certain that they get what they need.
Why Use a Market-On-Open Order?
There are a number of reasons that a person may want to place a trade outside of these hours. One such reason is convenience. Living in this busy world, it is not hard to imagine a scenario where a person wants to place a trade when they actually have the time (and before they forget).
Traders and investors may use a market-on-open order when they foresee a good buying or selling opportunity at the open of the market. For example, traders may expect price movement in a stock if significant news is released about a company after the market closes.
Good news, such as a company exceeding their earnings expectations, may lead to an increase in the price of that stock. Bad news, such as missing earnings estimates, may lead to a decline in the stock price. Some traders and investors may also watch the after-hours market and decide to place a MOO order in response to what they see.
Let’s look at a hypothetical example: Say that news breaks late in the evening regarding a large scandal within a company.
The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future.
They enter a MOO order to sell their holding as soon as the market is open for trading. Or, maybe they believe that the stock will bounce back throughout the day, so they place a MOO order to buy more stock at the open.
With a MOO order, the investor is committed to buying or selling stock at whatever the price may be at the open, no matter how much it has moved up or down since the previous trading day. The investor must be prepared for unexpected price moves.
Though this won’t apply to the average individual investor, MOO orders may also be used by the brokerage firms to fix errors from the previous trading day. A MOO order may be used to rectify the error as early as possible on the following day.
Risks of MOO Orders
It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different than the price at the previous close. Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different—or it could be a lot different.
Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.
It is very hard to predict the direction any one stock, security, or group of securities will be in the short-term, because short-term price movements can often be based on sentiment, not fundamentals.
Most investors will likely want to avoid trying to weave in and out of the market in the short-term and stick with a long-term plan. Some investors may use MOO orders with the intention of taking advantage of price swings, but the variability of the market could bamboozle a new investor.
Because the order could be filled at a price that is significantly different than anticipated, this may create the problem of not having enough cash available to cover a trade.
How a cash shortage during a market order is handled will typically depend on the brokerage firm and the type of account.
To be safe, it can be smart to make sure there’s a cash buffer available before placing any market order, including a market-on-open order. Contacting your financial services company for more information on how they would handle such a situation might also help.
An alternative option is to use a limit-on-open order, which is like a MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.
With a MOO order, there is also the problem of limited liquidity. Liquidity describes the degree to which a security, like a stock or an ETF, can be quickly bought or sold.
Investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.
But smaller companies can be more illiquid, making them slightly trickier to trade. In the event that there is not enough liquidity for a trade, the order may not be filled, or may be filled at a price that is very different than anticipated.
Getting Started with Investing
Feeling ready to get started? The next step for investors is to choose a brokerage firm or financial services firm, like SoFi Invest®. SoFi Invest provides many options for investors including those who want to control their own investment choices, and those who want more help via an automated investment service.
With SoFi Active Investing, investors buy and sell stocks and ETFs of their choosing. And there are no transaction costs, unlike at many standard brick-and-mortar traders.
Investors who’d like the help of an automated investment service may want to look at SoFi Automated Investing. This service invests according to a person’s goals, tolerance of risk, and investing timeline using low-cost ETFs—and with no additional SoFi fees.
With either SoFi Invest service, help from a certified financial planner (CFP) is never more than a phone call away. Because even the savviest investor may have questions about their investment accounts, transactions, or portfolio strategy from time to time.
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