What is a stop-limit order?

Photo showing the midsection of a woman showing a stop gesture to a businessman giving her an envelope on an office desk.
When setting up a stop-limit order, the stop price and limit price don’t have to be the same amount.

  • A stop-limit order is a type of trade that combines stop orders and limit orders into one.
  • Stop orders set a price to execute an order and limit orders specify how much should be bought or sold at that set price.
  • Not all stop-limit orders will execute and there are risks investors should be aware of.
  • Visit Insider’s Investing Reference library for more stories.

A stop-limit order is a way for investors to exert control over their trades while also managing levels of risk. There are two aspects of a stop-limit order: the stop price and the limit price. The stop price states that you’ll buy or sell at a specific price. The limit price sets a standard for buying or selling an amount of stocks when the price reaches the set price.

Here’s what to know about this conditional trade type and how it’s used.

What is a stop-limit order?

A stop-limit order is a financial tool that investors can use to maximize gains and minimize loss. The Securities and Exchange Commission (SEC) describes a stop-limit order as combining both stop orders and limit orders, which exist individually, into a single tool which investors can use as part of their risk-mitigation strategy.

Stop orders, sometimes referred to as a stop-loss order, is when you set a specific stop price on a stock. Once that stop price is reached, an order is executed to buy or sell a stock. That order then turns into a market order – actively trading on the market right away.

A limit order is a type of order where you buy or sell a stock at a certain price. So if you wanted to buy shares of a stock for $20, you could place a limit order of that amount and the order would take place only if and when the stock price was $20 or better.

Stop-limit orders merge two benefits from stop orders and limit orders into one financial tool. The stop order sets a price to execute an order and the limit order specifies how much should be bought or sold at that set price.

Stop orders alone turn into a market order trading immediately, whereas a stop-limit order turns into a limit order that will only be executed at a set price or even better.

“A stop-limit order is an order to buy or sell a stock at the market when it reaches a specified price, but then as soon as the stock has been bought or sold, the order becomes a limit order for an amount below the triggering price,” explains Jenna Lofton, a former Certified Financial Advisor with an MBA in Finance and founder of StockHitter. “This type of order gets one last chance to fulfill before it’s canceled without any execution. It helps protect against whipsaws and sudden spikes – especially on highly volatile stocks.”

Understanding how stop-limit orders work

Stop-limit orders combine the features of stop orders and limit orders to create a powerful strategy for investors to control costs. Investors need to set two price points:

  • The stop price
  • The limit price

The stop price and limit price don’t have to be the same amount. The stop price you set triggers execution of the order and is based on the price that the stock was last traded at. The limit price you set is the limit that sets price constraints on the trade and must be executed at that price or better.

“When trading, you can observe the market price and decide to buy or sell at any given moment, or you can condition the process so that it only activates once the price hits or exceeds the price point A (the stop) but does not break through the price point B (the limit). The latter option is called a stop-limit order,” explains Adam Garcia, founder of TheStockDork.com. “So you’re basically looking to buy the stock once it starts getting on an upward trajectory. On the other hand, there’s only so much that you can afford to pay, which is why you need to cap it.”

Let’s say you have a stop price of $50 on a sell stop limit order and your limit price is $45. If market conditions are appropriate and the price of a stock reaches $50 it would trigger a limit order that would only activate at the limit price of $45 or better.

An investor can execute a stop-limit order on their trades through their investment brokerage firm, though not all brokerages may offer this option. Additionally, brokerages may have different definitions for determining if a stop or limit price has been met.

Traders set a period of time when the stop-limit order is effective or can choose from good-til-canceled (GTC) option. Through these options, the stop-limit order is active until the price is triggered to buy or until the transaction expires. Stop-limit orders are executed during market hours.

You set a stop price which triggers the execution of an order. The limit price helps lower risk by stating that orders must be traded below or up to the limit price.

“You need to specify the timeframe in which this trade is going to be executed. But considering that this trade is conditioned, there’s no guarantee that it will actually happen. To make matters worse, this timeframe only includes regular trading hours. If a portion of your order gets executed today and the rest of it gets allocated across several days, your broker may charge several commissions instead of just one,” warns Garcia.

Pros and cons of stop-limit orders

Before deciding if a stop-limit order is a good strategy for you, consider the pros and cons.

Pros Cons
  • Offers more control and flexibility around costs
  • Can help lessen risk
  • You can use a buy stop limit or sell stop limit
  • Orders may not go through, depending on price
  • Can result in “partial fills” where not all of your orders actually execute

  • Brokerages may not offer this or have different standards

The financial takeaway

Using stop-limit orders as part of your investment strategy is one way to have greater control over how you invest and at what cost. You can set limits for both buying and selling and set parameters for executing orders on your terms.

While this strategy has its benefits, you should be aware that price fluctuations throughout the day can trigger an order and be “substantially inferior” to the closing price of the stock for that day, according to Investor.gov.

Be sure to check if this option is available at your brokerage firm and how they define prices so you know when your order would execute.

What is a broker? What to know about the intermediary that helps investors buy stocksA comprehensive guide to investing in stocks for beginnersWhat to know about swing trading and how to minimize risks of this speculative trading strategyWhat to know about speculation: When investors buy high-risk assets with the expectation of significant returns

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What to know about swing trading and how to minimize risks of this speculative trading strategy

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If you’re considering swing trading, you’ll need to have the skills required to analyze charts and numbers to be successful.

  • Swing trading is a speculative strategy where investors buy and hold assets to profit from expected price moves.
  • Swing traders leverages technical analysis to determine entry (buy) and exit (sell) points.
  • Swing traders are exposed to gap risk, where a security’s price changes while the market is closed.
  • Visit Insider’s Investing Reference library for more stories.

Investors approach the stock market with a variety of goals. Many invest for the long-term, seeking to build wealth over time, while others trade for short-term profits – and many people do both. There are a variety of strategies for trading, but one of the most accessible to newcomers is swing trading.

Unlike day trading, where trading is extremely fast paced, swing trading is slower. This strategy is a great way to understand market movements and dip your toe into technical analysis. Here’s what the curious trader should know.

What is swing trading?

Swing trading is a trading strategy where investors buy a stock or some other asset and hold it – known as holding a position – for a short period of time (usually between a few days and up to a several weeks) in the hopes of turning a profit.

The goal of the swing trader is to capture a portion of any potential price movement or “swing” in the market. Individual gains may be smaller as the trader focuses on short-term trends and seeks to cut losses quickly. However, small gains achieved consistently over time can add up to an attractive annual return.

How does swing trading work?

The swing trader analyzes patterns in trading activity to buy or sell a stock in order to capitalize on price movements and momentum trends of stocks, typically, focusing on large-cap stocks since they are the most heavily traded. Because these stocks have high trading volumes, they offer investors insight into how the market perceives the company and their security’s price movements. This active trading offers the information necessary for what’s called technical analysis, which we’ll cover in the next section.

As with any style of trading, swing trading carries plenty of risk. Swing traders are exposed to several types of risk, the most common being gap risk, where a security’s price rises or falls significantly based on news or events that occur while the market is closed, whether overnight or during a weekend.

The opening price will reflect the shock of any unexpected news. The longer the market is closed, the greater the risk. Abrupt changes in the market’s direction also pose a risk, and swing traders may miss out on longer-term trends by focusing on shorter holding periods.

Example of swing trading

Let’s take a look at a real-world example of how a swing trader may analyze Amazon’s stock and determine when to buy or sell.

Candle stick chart example of Swing Trade in Amazon (AMZN)
Amazon stock from March to July 2021.

The candlestick chart above illustrates the “cup and handle” consolidation pattern, where the cup is u-shaped and the handle points slightly downward. This pattern is considered a bullish signal.

If a swing trader wants to make a profitable trade in Amazon, they would likely purchase the stock at the top of the “cup,” at or above the most recent high of $3,555. They should place a stop-loss order at the most recent low in the cup handle ($3,395). Therefore, the risk – the maximum loss on the trade – is $160 ($3,555 – $3,395 = $160).

At the recommended reward/risk ratio of 3:1, which is considered good, you’d need to sell at $480 (3 x $160 = $480) above the entry price, or $4,035 ($3,555 + $480).

Why risk management is critical in swing trading

Risk management is the most essential component in a successful swing trading strategy. Traders should choose only liquid stocks and diversify positions among different sectors and capitalizations.

Mike Dombrowski, head of capital markets at InterPrime Technologies, emphasizes the importance of risk management, saying that “each position should be roughly 2%-5% of total trading account capital. The most aggressive and professional traders may go up to 10% per position. That means a portfolio of five concentrated swing trades would represent 10%-25% of total trading account capital on average.

Having cash in reserve allows you to add to the best-performing trades to help generate larger winners. As always, the key to swing trading is to minimize losses.” He also notes that a desirable reward/risk ratio is 3:1, or 3 times the amount at risk.

Stop-loss orders are a vital tool in managing risk. When a stock falls below the stop price (or rises above the stop price for a short position), the stop-loss order converts to a market order, which is executed at the market price. With stop losses in place, the trader knows exactly how much capital is at risk because the risk of each position is limited to the difference between the current price and the stop price.

A stop loss is an effective way to manage risk per trade

Swing trading strategies

Traders can deploy many strategies to determine when to buy and sell based on technical analysis, including:

  • Moving averages look for bullish or bearish crossover points
  • Support and resistance triggers
  • Moving Average Convergence/Divergence (MACD) crossovers
  • Using the Fibonacci retracement pattern, which identifies support and resistance levels and potential reversals

Traders also use moving averages to determine the support (lower) and resistance (upper) levels of a price range. While some use a simple moving average (SMA), an exponential moving average (EMA) places more emphasis on recent data points.

For example, a trader may use 9-, 13- and 50-day EMAs to look for crossover points. When the stock price moves above, or “crosses” the moving averages, this signals an upward trend in price. When a stock price falls below the EMAs, it’s a bearish signal and the trader should exit long positions and potentially put on shorts.

Market extremes make swing trading more challenging. In a bull or bear market, actively traded stocks do not exhibit the same up-and-down movements within a range as they do in more stable market conditions. Momentum will propel the market up or down for an extended period. “[Traders should] always trade in the direction of the trend, taking long positions in bull markets and shorts when the markets trend downward,” says Dombrowski.

Swing trading vs. day trading

Swing trading and day trading have many similarities, but the most marked difference is the frequency of trades. Swing traders focus on short-to-medium term positions while day traders close out their positions at the end of each trading day. Day trading is a full-time job, requiring the trader to monitor market movements throughout the day and trade frequently. A swing trader can manage and trade on the side while still maintaining a full-time job.

Let’s look at the principal differences.

Swing trading Day trading
Trading frequency Mulitple trades per week Multiple trades per day
Time required to trade Can be done periodically Requires constant attention
Number of transactions Fewer transactions Many intra-day transactions
Profit potential Gains and losses accumulate slowly Gains and losses accumulate more quickly
Trading outlet Brokerage account Specialized trading software
Costs Lower Higher

The financial takeaway

Swing trading is an easy way for new traders to get their feet wet in the market, with traders typically starting with $5k-$10k, although less is acceptable. The cardinal rule though is that this capital should be money the investor can afford to lose. Even with the strictest risk management, the unexpected is always possible.

More importantly, swing trading doesn’t demand the same level of active attention as day trading, so the swing trader can start slowly and build the number of trades over time. But it does require the investor to take a deep dive into technical analysis, so an aptitude for charts and numbers is necessary.

For traders willing to spend time researching stocks and developing an understanding of technical analysis, swing trading offers the potential to accumulate attractive profits, slowly but steadily, over time.

Trading and investing are two approaches to playing the stock market that bring their own benefits and risksShort selling is a high-risk but high-reward trading strategy that profits from a stock price’s fallA long position means you buy a stock or stock option in the bullish belief its value will increase over timeMargin trading means buying stocks with borrowed funds – it’s riskier than paying cash, but the returns can be greater

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Understanding buy-and-hold investing – a long-term strategy that Warren Buffett swears by

A photo of a young businesswoman talking on a cellphone while checking the time on her watch in an office.
Some investors say that buy-and-hold investing is the best way to manage risk.

  • Buy-and-hold is a long-term investment strategy that involves purchasing securities and keeping them in your portfolio for a long period of time.
  • Some investors say that buy-and-hold investing is the best way to manage risk and work toward long-term financial goals.
  • Opponents argue that you could get better results with a hands-on approach to your portfolio. However, historic results typically favor a passive investment plan.
  • Visit Insider’s Investing Reference library for more stories.

We’ve all heard the saying: Good things come to those who wait. This can be applied to investing, where you can choose to buy the stock of a company you think will be successful over time, with the expectation of long-term profits. This is known as a buy-and-hold strategy.

What is the buy-and-hold strategy?

Buy-and-hold investing is a strategy where passive investors purchase an investment, like a stock or mutual fund, and keep it for a long period of time despite changes in the market. Many famous investors, such as Benjamin Graham and Warren Buffett, are well-known fans of buy-and-hold investing.

Over a short period of time, financial markets tend to fluctuate. Stock and other asset prices go up and down almost constantly during trading hours. Graham, the author of “The Intelligent Investor,” equates buying and selling stocks on a short time horizon to gambling. He says that true investing takes place over a longer time span.

Whether you manage your own portfolio or work with a trusted financial advisor, buy-and-hold investing is the best investment strategy for most people. If you are investing for retirement or other goals at least 10 years away, buy-and-hold investing is a natural fit.

Should you try the buy-and-hold strategy?

The strong argument for buy-and-hold investing is that, over a long enough period of time, a well-run company should increase in value.

Buying and holding allows you to ride out the waves and noise of the markets and capture that gain in your portfolio. For example, the average 10-year stock market return is 9.2%.

But not all investors are fans. Some mutual funds do fall into the group that can outperform the market, and actively managed fund advocates say that the biggest advantages can be seen in a down market. That’s something we have not experienced in a while.

The financial takeaway

The buy-and-hold strategy is a form of passive investing, and it’s easy to see why it’s become a go-to approach for most people.

Buying and selling stocks quickly may be exciting, but it is also very risky. Where your retirement and future are involved, you don’t want your portfolio to feel like a Las Vegas casino. If a slow-but-steady route to growing your wealth sounds enticing, buy-and-hold is probably the best investment strategy for you.

A comprehensive guide to investing in stocks for beginnersHow to hedge against inflation with investments that keep pace with rising pricesWhat to know about speculation: When investors buy high-risk assets with the expectation of significant returnsShort selling is a high-risk but high-reward trading strategy that profits from a stock price’s fall

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What is leverage? How investors can use debt to increase the returns on investments

Anvil with the word debt and a money bag with the word profit balance on scale
While leveraged investing can be a useful technique to make money off the market, it exposes investors to higher risk.

Table of Contents: Masthead Sticky

  • Leverage is when you use borrowed funds to increase the potential return of an investment.
  • Leverage is used by professional traders, individuals who are making big-ticket purchases, entrepreneurs, and investors.
  • While leverage can help compound your returns, it can also compound your losses.
  • Visit Insider’s Investing Reference library for more stories.

We’ve all heard it before: Debt is bad. But that isn’t always the case. Debt can sometimes be used to build credit, start building equity through the purchase of a new home – or even by leveraging it to make an investment that may yield a profit. Leveraging is when you tap into borrowed money – such loans, securities, capital, or other assets – for an investment with the intention to potentially increase the return of said investment.

Here’s what you need to know about what leverage is, how it works, and how it’s used among business owners, investors, and everyday people looking to turn a profit.

What is leverage?

Leverage in an investment strategy that involves tapping into borrowed capital to bolster the potential return of an investment. It can be used in the realms of business, professional trading, or to finance a house. Leverage can also refer to how much debt a particular company uses to fund an asset, which is known as financial leverage.

While leverage might increase the returns of an investment, there’s a downside: Should an investment not work out, it could also increase the potential risk and loss of an investment.

“While leverage can magnify returns if someone can earn more on the borrowed funds than what they cost, the opposite is true,” says Robert R. Johnson, a professor of finance at the Heider College of Business at Creighton University. “Leverage [also] magnifies losses when one earns less on the borrowed funds than [what they] cost.”

How leverage works

Leverage is when you tap into borrowed capital to invest in an asset that could potentially boost your return. For example, let’s say you want to buy a house. And to buy that house, you take out a mortgage. By loaning money from the bank, you’re essentially using leverage to buy an asset – which in this case, is a house. Over time, the value of your home could increase.

Leverage is used by entrepreneurs such as CEOs of corporations and founders of startups, businesses of all sizes, professional traders, and everyday individuals. Essentially, anyone who has access to borrowed capital to boost their returns on the investment of an asset uses leverage.

“When making a purchase, investors can use a combination of both their own equity capital and leverage to expand the affordability of any investment,” says Keith Carlson, CEO and managing partner of Roebling Capital Partners. “Simply put, debt and equity availability will always be greater than equity alone; what one can purchase using both will always be more substantial.”

Leverage also works for investors in bolstering their buying power within the market-which we’ll get to later.

Types of leverage

There are four main ways leverage can be used:

Financial leverage: A business can tap into leverage by way of taking out loans or issuing bonds. This can be more beneficial for a company that doesn’t have a lot of assets or wants to avoid having to sell the company’s equity to raise money. And in turn, leverage can be used to do a number of things: expand operations, buy inventory, materials, or equipment, or to kick-start new ventures.

This is called financial leverage, which is when a company takes on debt to buy assets that it expects to yield profits that will exceed the cost of what it borrowed. Debt-to-income ratio is used to calculate a company’s financial leverage to help potential investors determine whether the company is a risk or valuable investment worth making.

“A corporation can utilize leverage to build shareholder wealth in the business sector, but if it fails to do so, interest expense and the chance of failure destroys the shareholder value,” says Jonathan Saedian, a CEO and founder of Initiate.AI. “While it increases the buying power of an investor by allowing them to make increased gains with the use of more buying power, it also increases the risk of having to cover the loan.”

Debt-to-Equity (D-E) Ratio formula

Leveraged investing: Investors can use leverage to bolster their buying power. Professional traders do what’s called “buying on margin” to use borrowed funds to have more money to invest in. In turn, it can lead to greater returns. When you buy on margin, you draw from loaned money to buy securities in a margin account. With margin accounts, you can make larger investments with money you borrow.

“Investors can use margin to control a larger pool of assets with a smaller amount of money,” says Johnson. “In the stock market, investors can control $100,000 worth of securities with $50,000.”This means you use less of your own personal money. While it compounds your gains, it can also compound your losses.

However, buying on margin can be tricky, complicated, and fast-moving, and there are great risks involved. In some cases, investors may lose far more money than they initially put in. “If you try to magnify your returns by using leverage, you may not have the financial wherewithal to withstand the interim volatility before the wisdom of your decisions pan out,” says Johnson.

Using leverage for personal finances: While leverage is often associated with investing, individuals also use leverage to make big-ticket purchases. When people take out a loan to purchase an asset or with the hopes of growing their money in the future, they are using leverage.

For instance, if you take out a loan to invest in a side business, the investment you pour into your side business helps you earn more money than if you didn’t pursue your venture at all.

Leverage in professional trading: To dramatically increase their purchasing power, professional traders often take on a more aggressive approach to leverage, and take on higher levels of borrowed capital for even more significant returns to an everyday investor.

Professional investors often have higher limits on the borrowed capital and don’t go by the same requirements as non-professionals. Again, as the gain and risk can be substantially higher, this is for the pros with a different level of knowledge, depth of experience, and comfort level with risk.

Example of leverage in investing

Let’s say a startup got off the ground with $3 million from angel investors. Should the startup borrow $7 million, there’s now $10 million total to put into running the business. Furthermore, there’s also greater opportunity to boost its value to shareholders.

For example, within brokerage margin accounts, a 2:1 ratio is often used, explains Brian Stivers, an investment advisor and founder of Stivers Financial Services. Stivers provides the following example: You can purchase $10,000 in stock by putting $5,000 of your own money into the account, and borrowing the other $5,000 from the broker using the stock and cash as collateral.

“Let’s say the value of the stock rose 30%, and you sold the stock for $13,000,” says Stivers. “You would then pay the broker back $5,000 leaving you with $8,000. So, you made a $3,000 profit on your $5,000, which is a 60% gain. Had you just purchased $5,000, you would have only increased your value by $1,500 for a 30% gain.”

As you can see, using leverage enabled you to purchase more of the desired stock and enjoy greater gains. “But beware, if the value of the stock goes down you are also exponentially increasing your loss potential as well,” says Stivers.

Leverage vs. margin

While leverage and margin are similar, there are some major differences between the two:

  • Leverage is the practice of actually receiving a loan from a bank or lending institution for specific purposes, explains Saedian.
  • Margin is specific to investing in other financial instruments, says Shanka Jayasinha, chief investment officer of S&J Private Equity. “For example, a margin account enables you to borrow money from a broker for a fixed interest rate,” says Jayanisha. “With this, you can invest in leveraged securities. On the other hand, if you were to take a mortgage, this is not considered margin, it is leverage.”
  • When you use leverage, there is an actual cash disbursement for specific purposes. With margin, on the other hand, no cash is disbursed. However, the strategy is used to achieve a similar outcome and you’re using someone else’s money to obtain an asset with the hope of increasing your return.
  • With margin trading, the investor borrows money from their broker to buy securities such as bonds and stocks.

The financial takeaway

Leverage is a common strategy where a person or company uses borrowed money to invest and potentially grow an investment with the expectation of turning a profit. It can be used in a number of ways: to help kick-start or expand a business, to increase shareholder wealth, to buy a home or attend college, or when investing in the stock market.

While leverage can increase one’s return, it can also increase the losses of an investment. By understanding the risks involved, it can help you decide whether using leverage is the right choice for you and your finances, and for what types of investments.

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What is the New York Stock Exchange? Understanding the biggest marketplace for investors in the world

new york stock exchange
The New York Stock Exchange dates back over 200 years.

  • The New York Stock Exchange (NYSE) is the largest stock exchange in the world.
  • It is a marketplace for investors to buy and sell publicly traded stocks and securities.
  • The NYSE uses an auction-based system that connects buyers and sellers either through electronic trading or physical floor trading.
  • Visit Business Insider’s Investing Reference library for more stories.

What do you picture when you hear the words “stock exchange?” If the words invoke images of busy screens and suits on a bustling trading floor, the reality of the New York Stock Exchange (NYSE) isn’t too far off.

The NYSE is the world’s largest and most well-known stock exchange, with a market capitalization of around $24.5 trillion. It’s the trading home to some of the biggest companies, from prestigious blue-chip stocks to young and exciting high-growth stocks.

Understanding the inner workings of the NYSE can provide key foundational knowledge for investors.

What is the New York Stock Exchange?

GettyImages 668600179
The NYSE facilitates the trade of corporate stocks and other securities.

The NYSE – also referred to as the “Big Board” – is the biggest stock exchange worldwide based on the market capitalization of its listed securities. Formerly operated as a private organization, the NYSE is now a publicly traded company owned by Intercontinental Exchange Inc. It’s ticker symbol is NYSE: ICE.

The NYSE’s headquarters is located on Wall Street in New York City, which is home to the exchange’s iconic physical trading floor. The NYSE provides a central marketplace for buyers and sellers to trade shares of stock in public companies – about 1.5 billion shares a day, to be exact.

The exchange lists many of the world’s biggest companies, with sectors including technology, healthcare, energy, financial services, and more. In fact, you’ll find that much of the S&P 500 and Dow Jones Industrial Average traded on the NYSE.

A brief history of the NYSE

The NYSE first opened on May 17, 1792, when a group of 24 stockbrokers signed the Buttonwood Agreement, a document outlining the rules and regulations of securities trading.

In the beginning there were only five listed securities compared to today’s 2,300 counting. The Bank of New York was the first stock listed on the NYSE.

In 1971, the NYSE officially became a not-for-profit corporation, and officially transitioned to a publicly traded company in 2006, which is what it remains today. It’s taken a series of mergers for the NYSE to garner the size and global traction it claims today. Among the most notable was its 2013 purchase by the Intercontinental Exchange Inc. (ICE), an organization that owns and monitors financial and commodity exchanges, in a deal worth $11 billion.

From stock market crashes dating back to 1929, to trading being halted for four days after the 9/11 attacks, the NYSE has faced many notable and historic challenges. In March 2020, the NYSE closed its trading floors and switched to all-electronic trading due to the coronavirus pandemic. To date, the floor remains only partially open.

How does the NYSE work?

General view of atmosphere during the NYSE opening bell ceremony at the New York Stock Exchange on December 15
The trading floor of the NYSE.

The NYSE operates as an auction, with floor brokers setting the “bid” price, or the price they’re willing to purchase a stock, as they buy shares on behalf of their clients. These clients can include banks, broker-dealers, hedge funds, mutual funds, day traders, and some high net-worth individuals.

On the other side of that relationship lies sellers, who submit an “ask” price that typically exceeds the bid price. Sellers are individuals or organizations that offer securities for purchase, like stocks, bonds, or commodities.

Then there are dealers, who serve as an intermediary between brokers and sellers, pocketing the difference between the bid and ask price as compensation for their work.

When a broker executes a selling order, it isn’t complete until a dealer finds another broker to purchase the order. Because of the complexity of the arrangement, not just anyone can trade on the floor of the stock market. All parties involved are required to attain NYSE approval and carry a trading license.

Over time, the NYSE has evolved and modernized its trading environment. Up until about the 1980s, the NYSE relied on the boisterous open outcry system to communicate trade orders through verbal and physical signals such as hand signals and shouts.

Today, electronic trading is the norm on the floor of the NYSE. The “dealer” is a computer that automatically connects buyers with interested sellers, who each get updated information electronically. However, floor traders are still around to facilitate high-volume trades and set pricing live when necessary.

NYSE listing requirements

Before a public company can be listed on the exchange, it must meet a few stringent requirements. In terms of structural standards, all listed companies are required to have a minimum of 400 shareholders and 1.1 million outstanding shares.

Financially, listed companies must have a share price of at least $4, with the market value of its publicly held shares reaching at least $40 million. On top of that, there are also profitability standards that must be met.

Listed companies are required to earn at least $10 million over the past three years and maintain a global market capitalization that meets or exceeds $200 million.

NYSE hours

The NYSE operates daily from 9:30 a.m. to 4:00 p.m. ET, excluding weekends and public holidays, with extended trading hours trading available, too.

The NYSE is well-known for its opening and closing bells, rung at 9:30 a.m. and 4:00 p.m. respectively, to mark the start and end of the trading day.

These used to be rung by floor managers, but the tradition has evolved into executives from companies listed on the exchange coming to ring the bells daily, often in accordance with relevant marketing events or new mergers or acquisitions.

The financial takeaway

The New York Stock Exchange is the world’s largest and most well-known exchange, facilitating between two and six billion trades per day. It operates following a complex auction-based system between three parties: dealers, sellers, and brokers.

Although the NYSE is a world-renowned exchange today, it’s taken time and expansion to earn the reputation it’s built.

What is the Nasdaq? Understanding the global stock exchange that’s home to the fastest-growing, most innovative companiesWhat is OTC? A beginner’s guide to over-the-counter markets, and the risks and rewards of investing outside the major stock exchangesA guide to stock market indexes: What they measure and how they can guide your investingWhat is a stock market correction? How to make sense of sudden drops in the market

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How market value can help you determine the true worth of company or asset

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A company’s market value is useful in eliminating the uncertainty behind what an asset is worth.

  • Market value is the value of an asset or company in the marketplace, according to what investors are willing to pay for it.
  • Investors use market value to analyze investment opportunities.
  • Market value is used interchangeably with market capitalization, but it is a more complex measurement based on a range of factors.
  • Visit Business Insider’s Investing Reference library for more stories.

Evaluating where a business stands in relation to its competitors and industry is a key step in deciding whether a stock is worth your investment.

Market value, or the value of a security in the eyes of the market, is one of the many metrics investors use to evaluate a company’s worth.

Most often used in tandem with book value, market value gives individuals a look at the bigger picture. If you’re looking for leg up to spot the right investing opportunities, understanding all the factors that comprise an asset’s market value is a must.

What is market value?

Market value, sometimes called open market valuation, is the value of a company’s stock in the marketplace. The metric is influenced by how investors view a company’s potential.

Market value is about a “company’s overall actual value” and factors in things like “how profitable the company is, how much debt it may have, and even the financial health of the sector of the economy it is in,” says Bobbi Rebell, Certified Financial Planner.

A company’s market value is useful in eliminating the uncertainty behind what an asset is worth. Buyers and sellers don’t always agree on a value of a product, and each side has different goals, with buyers hoping to pay less and sellers hoping to charge more. Market value provides a fair estimation of the value or worth of any given asset.

What factors impact market value?

Market value is a dynamic measurement that fluctuates considerably with time and takes numerous factors into account, such as: long-term growth potential, supply and demand of a business’s shares, and valuation ratios used to evaluate whether a stock is overpriced, underpriced, or priced fairly.

The most common market value ratios used to evaluate a company’s stock include:

  • Earnings per share: Because a higher earnings per share indicates a more profitable business, this metric can positively (or negatively) influence how investors view a company’s worth.
  • Book value per share: This number is found by dividing a company’s equity by total outstanding shares. Higher book values tend to mean that a stock is undervalued, and can therefore impact how the asset or company is perceived by the market.
  • Price-to-earnings ratio (P/E ratio): This ratio is the current price of a stock divided by its earnings per share. A high P/E ratio indicates that a stock’s price is high relative to its earnings and may be overvalued by the market.

Market values exist within a wide range, with smaller, more niche companies or industries valued considerably below their better-known, billion-dollar counterparts. The higher a company’s estimated worth, the greater its market value.

Calculating market value

Since it is determined by various metrics, there isn’t a single formula used to calculate market value.

If you’re looking for a quick way to calculate market value, you may be thinking of market capitalization, a similar, but wholly different metric used to determine a company’s financial standing.

For private companies that don’t publicly disclose its financials, it can be harder to assess market value. It’s typically done by comparing a private business’s value to publicly-traded ones in the same industry with similar sizes and growth rates, and calculating relevant ratios to contextualize its performance.

Market value vs. book value

When assessing whether an asset is appropriately valued, market value is typically analyzed side-by-side with book value. Book value is basically the value of a company according to its books, or balance sheet.

To get a company’s book value, you take the difference between a company’s total assets and total liabilities. Learn more about the difference between market value and book value.

Book value takes a little more work to calculate than market value. A stock is generally considered undervalued if its market value is well below its book value, since this means the stock is being traded at a discount. However, the opposite is not necessarily true.

Profitable companies often have higher market values than book values. This is because investors are optimistic about their potential for growth and expansion, and also because some companies have more earnings power, or ability to generate profit, than current assets. In some cases, however, a higher market than book value could, in fact, indicate that the asset is overvalued.

Market value vs. market capitalization

Market value is a term often used interchangeably with market capitalization, but wrongfully so.

Market capitalization is a much simpler measurement than market value. To arrive at a company’s market capitalization, you multiply the number of shares outstanding by the current price of a single share. Market capitalization solely measures the equity value of a company.

In contrast, market value paints a broader, more nuanced picture of a company’s financial standing. It isn’t set in stone, but varies depending on the state of the economy, falling during times of recession and rising during periods of expansion.

Market value is also more significantly influenced by market perception than market capitalization. Rebell says that because market value has so many subjective components, it has a lot in common with market perception.

“Perception, of course, can be anything including what journalists are writing about the company, or the perception of a company created by the founder’s tweets. A great example is Tesla. By many financial metrics, one might say the stock is overvalued. However, comments made by Elon Musk and the perception they create have factored into the stocks performance,” says Rebell.

This leads into one of market value’s limitations: how much it can fluctuate.

Limitations of market value

Market value is affected by factors like what industry the firm or asset belongs to, its overall profitability, and how much debt it’s taken on, among other factors. Here are some limitations of using market value as a guide for when to invest in an asset.

  • It fluctuates: A firm or stock’s market value can rise and fall considerably based on changing supply and demand, with a rise in demand met with a steady supply facilitating a temporary and misleading hike in market value.
  • It requires precedent data: It can be hard to determine the market value of a new firm or equity, because they don’t have an inherent market value. To this end, establishing market value requires historical pricing data to compare with or create realistic estimates of.

Market value calculations offer both sides of the equation a fair and transparent assessment of worth. However, because it can be so subjective, it’s important for investors to decide for themselves which metrics are most important in their own evaluation of an investment.

The financial takeaway

Market value illustrates an asset’s value to investors in the marketplace and is often used alongside other measurements to assess whether a firm or asset’s valuation is accurate.

This metric brings clarity and transparency to both buyers and sellers, but fluctuates with time, depending on factors like industry and economic conditions.

The price-to-book ratio is a way to determine if a company’s stock price accurately reflects its financial valueBook value vs. market value: Knowing the difference between these two measures can help investors pick stocksWhat is the P/E ratio? An analytical tool that helps you decide if a stock is a good buy at its current priceHow to invest in dividend stocks, a low-risk source of investment income

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What are the hours of the stock market? Here’s when major exchanges around the world open and close

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Knowing when the market opens and closes is important to know when to place your trades.

  • In the US, the New York Stock Exchange and the Nasdaq are open weekdays from 9:30 a.m. to 4 p.m. EST.
  • Extended-hours trading is available to both retail and institutional investors via electronic communications networks.
  • Trading outside of normal hours comes with risks, including price uncertainty, less liquidity and higher volatility.
  • Visit Business Insider’s Investing Reference library for more stories.

If regular trading hours on Wall Street run from 9:30 a.m. to 4 p.m., shouldn’t we stop hearing about market hikes and dives by dinner time?

Well, stock market hours aren’t that simple. Trading doesn’t stop when markets close, and it doesn’t necessarily start when they open either, thanks to pre-market and after-hours trading.

Trading outside of normal hours isn’t new, but it’s become more accessible for retail traders due to the rise of electronic communications networks, or ECNs. These digital systems facilitate trading beyond traditional hours, connecting buyers and sellers directly without an intermediary.

However, just because extended-hours trading is an option doesn’t necessarily mean it’s one you should take. Trading outside of regular hours comes with risks like less liquidity and higher prices.

What time does the stock market open?

The two major US exchanges are the New York Stock Exchange (NYSE) and the Nasdaq. They are both based in New York and are open Monday through Friday from 9:30 a.m. to 4 p.m. EST.

Beyond regular trading hours, stock markets close for only nine federal holidays. On early-closure days, typically the days preceding and following a market holiday, regular trading ends at 1 p.m.

You may think trading stops outside of normal stock market hours, but there’s more to the story. Most stock futures, which are contracts traders use to speculate an underlying asset’s price and trade in the direction of that index, start trading at 6 p.m. EST on Sundays. This is why it’s not unusual to see a stock-market-related headline over the weekend.

Stock market trading hours around the world

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The Toronto Stock Exchange operates from 9:30 a.m. to 4:00 p.m. EST.

For individuals who wish to invest in international exchanges, that’s an option, but time disparities can present a challenge. Many international exchanges have the same hours in local time as those of the US. And although traders can place orders before opening, the trades have to be executed during the hours in which that market operates.

Here are the regular trading hours for some of the biggest stock exchanges in the world:

  • Canada: The Toronto Stock Exchange has a market capitalization of $2.1 trillion and operates from 9:30 a.m. to 4:00 p.m. EST.
  • China: The Shanghai Stock Exchange has a market capitalization of $4.9 trillion and operates locally from 9:30 a.m. to 3 p.m., or 9:30 p.m. to 3 a.m. EST.
  • Hong Kong: The Hong Kong Stock Exchange has a market capitalization of $4.4 trillion and operates locally from 9:30 a.m. to 4 p.m., or 9:30 p.m. to 4 a.m. EST.
  • India: The Bombay Stock Exchange has a market capitalization of $1.7 trillion and operates locally from 9 a.m. to 4 p.m., or 11:30 p.m. to 6:30 a.m. EST.
  • Japan: The Tokyo Stock Exchange is the largest Japanese exchange and the second largest globally, with a market capitalization of $5.7 trillion. It operates locally from 9 a.m. to 3 p.m., or 8 p.m. to 2 a.m. EST.
  • Netherlands: Euronext is based in the Netherlands and is the largest stock exchange in Europe, with a market capitalization of 3.9 trillion. It operates locally from 8 a.m. to 4:40 p.m., or 2 a.m. to 10:40 a.m. EST.
  • United Kingdom: The London Stock Exchange considers itself the most international global exchange, featuring more than 3,000 listings and a market capitalization of $3.2 trillion. It operates locally from 8 a.m. to 4:30 p.m., or 3 a.m. to 11:30 a.m. EST.

Investing through foreign exchanges can be done by setting up an international account through most major stock brokerages, but individuals should consider the complexities of foreign currency exchange, as well as the tax implications of trading globally before opting to go this route.

What is extended-hours trading?

Extended trading occurs when the market closes and an investor buys or sells a security outside of regular trading hours.

Extended-hours trading is performed via electronic communications networks, and includes both pre-market and after-hours trading. However, volume on these trades is limited since there are fewer participants.

Investors typically seek to trade outside of normal hours when major news, like an earnings release, inspires them to buy or sell, but comes after the exchange has closed or before it opens.

After-hours trading can be a strong indicator of which direction the market will open, and it should be noted that most extended-hour trades happen close to normal trading hours, since relevant news is usually released either right before markets open or soon after they close.

The three stock trading sessions

  • Pre-market: Runs from as early as 4 a.m. to market open at 9:30 a.m. EST.
  • Regular market hours: Spans from 9:30 a.m. to 4 p.m.
  • After-hours: Begins at 4 p.m. and can run until 8 p.m. EST, but trading volume tends to slow down considerably by around 6pm.

Risks of extended trading

Though extended trading allows investors to act fast and beat the rest of the market, it comes with some risks to be aware of.

  • Less liquidity: Extended-hours trading has lower trading volume than traditional hours, and some stocks can’t be traded at all outside of traditional hours. This makes it harder to execute trades and causes lower liquidity.
  • Higher volatility: Due to lower trading volume, trades during extended hours often come with larger spreads, or differences between an equity’s bid and ask price. This can make it harder for investors to carry out transactions at the desired price and can facilitate drastic price movements.
  • Price uncertainty: In the same vein as above, high volatility makes it harder to predict a stock’s price outside of traditional trading hours, and an equity’s price during extended hours doesn’t always closely align with its price during normal trading hours.

Where there’s risk, there’s room for reward. Trading outside of normal hours comes with the major perk of allowing investors to react to news, like poor earnings, immediately after it’s announced instead of having to wait for an exchange to open, by which time a stock’s price may already have dropped drastically.

The financial takeaway

The main US stock exchanges – the NYSE and the Nasdaq – are open from 9:30 a.m. to 4 p.m on weekdays, but individuals can trade outside of these hours, too. Extended-hours trading allows investors to act fast following news that might affect a stock’s price.

Trading beyond normal hours can be risky, since stocks are less liquid and more volatile, but can also be worth it.

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