There are a number of things that can impact an investor's entry (buy) into or exit (sell) out of a given stock and/or sector. Depending on the investor and his or her goals and investing time frame, the importance of timing the entry will differ. Obviously, the shorter the time frame the more important the entry; specific entries matter little to long-term (five years or more) investors. (To find out what market timing is all about, see Understanding Cycles - The Key To Market Timing and What is the best time of the day to trade?)
That said, all investors should be aware of some of the more common market moving influences that can affect a stock's price. By becoming aware of these market traits, investors can make better entries and catch an extra percent or two in return.
Let's take a look at eight items that can materially impact the average day's trading.
1. Overseas Market/Economic Action
The New York Stock Exchange (NYSE) opens for business at 9:30am EST each day. However, prior to the opening trade on the "New York", equity markets in Asia and Europe have already (or almost) finished their trading day. The point is, if certain stocks and/or sectors have had a particularly good or bad day in those markets, the sentiment could have an impact on trading here in the U.S. (To read more, see Where can I find information about pre- and after-hours trading?)
For example, a pessimistic outlook for technology companies in Asia and/or pharmaceutical companies in Europe could easily spill over into U.S. trading and cause American technology and pharmaceutical stocks to take a nosedive. This in turn has a major adverse impact on all of the major indexes. If you see major negative activity in a foreign market that impacts your sector, it might be best to wait until the dust settles before you enter the position. This will often save you some money right from the start.
2. Economic Data
If there is talk that China may revalue its currency (the yuan), then it may cause shares of exporters to China to trade higher. (The logic behind this is that Chinese companies and individuals will be able to afford more U.S.-made products with a higher yuan).
Incidentally, interest rate changes can also cause money to flow into and/or out of certain markets. For example, as interest rates in the U.K. rise, investors in that market may flee for better opportunities. Often, U.S. stocks will reap the benefit. (Keep reading about interest rates in How Interest Rates Affect The Stock Market and Trying To Predict Interest Rates.)
In choosing when to invest, you should be aware of any economic news that is or will be coming out around the time you go to enter your position. If a highly anticipated economic release is set to come out that may lead to market volatility, it might be best to wait for its release instead of jumping in beforehand.
3. Futures Data
Although an individual might be eager to buy or sell stock "at the open" at a favorable price, futures data will give the individual a better idea of whether that will actually be possible. Index futures cover the major market indexes. They start trading before the stock market and are a very good indicator of what the stock market opening will look like. The reason for this is that index futures prices are closely linked with the actual level of the Dow Jones Industrial Average (DJIA). (To learn more, read Modernize Your Portfolio With ETF Futures.)
In short, investors should check to see if futures contracts are trading higher or lower in pre-market trading. This will give them a better feel for where the index they are tracking might be headed "after the open". You will usually find CNBC or other market outlets talking about the movement of DJIA or S&P 500 futures before they open.
4. Buying at the Open
Buying or selling stock at the open of the market might not be a good idea.
A lot of buying and/or selling typically occurs within the first hour of the trading day. The opening hour of trading is basically the first time that most market participants have to enter or exit the stock, which can easily produce higher-than-average trading volume. These market participants are reacting to the myriad of news stories that came out between yesterday's close and today's open, which includes major market news events like economic reports and political changes.
Prior to the open, a handful of bellwether stocks report earnings or disseminate news. This can cause some investors (both retail and institutional) to rotate money in or out of a sector at the first chance they get - creating a mad rush at the open.
5. Midday Trading Lull
There is typically a drop off in trading (meaning the volume of transaction) at noon as most of the major news events are out in the market. During this lull, stock prices can often lose some ground.
When this happens, stocks can be purchased at a cheaper price at 1pm than they could at, say, 11am. Again, this is important to know, as this can affect both entry and exit points.
6. Analyst Upgrades/Downgrades
An analyst may disseminate an intraday note that can have a significant impact on a given stock and/or sector. As a tip, remember to scan financial websites or watch business reports on television. If a large company has just been upgraded or downgraded, try to judge the potential impact on certain industries and the market as a whole.
For example, if a major semiconductor stock were downgraded by a well-known analyst due to slackening demand for that company's products, it might be reasonable to assume that other smaller players may be experiencing similar trends. It might also be logical to assume that shares of computer makers (which purchase large numbers of semiconductors) might be impacted as well. (To read more on analysts' impacts on stocks, see Mad Money ... Mad Market?, What To Know About Financial Analysts and Forecasts Can Spell Disaster For Some Stocks.)
Also, if a major homebuilder was upgraded due to strong demand for its homes, it is reasonable to assume that other sizable players within the industry (that have the same geographic footprint) may be experiencing a similar increase in demand. By extension, the increase in demand for new homes could mean big business for home improvement stores and/or furniture makers.
7. Web-Related Articles
The internet has transformed the way people invest, as well as the way the public at large obtains news; therefore, if a web writer or journalist disseminates a bullish or bearish article about a company throughout the trading day, this can have a huge impact on its stock.
All investors should try to peruse the web and visit major news portals throughout the day, to see if there are any potentially market-moving news stories in the public domain. Be careful to avoid sites that give recommendations based on the stocks they own. These pump-and-dump schemes are prevalent on the web. (For more information on online scams, see our Online Investment Scams Tutorial.)
8. Friday Trading
Even if you're a "buy and hold" investor, a significant number of retail and institutional traders typically liquidate their equities on Friday (usually in the afternoon), so they don't have to hold their positions and assume risk through the weekend.
What does this mean for you?
It means that stocks can and often sell off Friday afternoon during the last few hours of the trading day, if for no other reason than traders are looking to go home "flat" (without positions on their books). Keep this in mind on Fridays if you are trying to find a favorable time to enter or exit a stock position.
While company-specific events can have an impact on equity prices, there are a number of other factors that can affect your shares as well. Savvy investors should be aware of them.