My money is doing nothing more than 80% of the time!

May 27, 2007 8:53 PM

Since the stock market is only active from 9:30-4 M-F, (less than 20% of the hours in the week, and even less of the year because of holidays), is it possible to sell at the end of the day and plop the money into a savings account, and then buy again on the beginning of the next day? If not, what prevents this from happening? Is it just fees? Would be an easy way to make an extra 4%/year from interest.
posted by tasty to work & money (17 comments total)

If you happen to have a broker that will pay high-frequency interest on your cash balance, and you pull your money out of stocks, then you can do this.

HOWEVER

Markets may not be open "after hours," but there is often a small volume of trading that occurs, particularly if there is a news event.

Go to Google Finance. Search for MSFT, drop the "settings" section down and turn "extended hours" on. Then turn off "news flags". Set the zoom to 5 days or less, so you can see the 15-minute quotes.
posted by b1tr0t at 9:02 PM on May 27, 2007

Not really practical. Assuming you can even get a savings account that does this and returns an optimistic 5%, you'd be getting %0.01369 / day. Note that a 0.01 bid/ask spread on a $25 stock would be 0.04%, so you'd have to buy back the stock at exactly what you sold it at just to break even before commissions. If you got charged $5 per trade (optimistic!) you'd need $36,500 in the stock to cover the commission, and the more shares you have, the less likely it is you can avoid paying a bid/ask penny either way even with an extremely liquid stock.

Not to mention you'll no longer be able to get the much better long-term capital gains tax rate, filling out your taxes will be insane, and you'd miss out on the often-signifcant movement that happens when companies issue their earnings reports (which almost always happens after hours).
posted by 0xFCAF at 9:09 PM on May 27, 2007

If the fees didn't kill you, the spread would.
posted by pompomtom at 9:12 PM on May 27, 2007

You're assuming you can sell it at 4 pm one day and buy it back the next day for the same price. But that's not remotely true—stocks open for whatever price the market is willing to pay/receive, and that incorporates whatever news came out overnight.
posted by raf at 9:34 PM on May 27, 2007

0xFCAF is totally right about the fees--it'd be nicer to just write your broker a single check for all your money. That way, at least they'd get to keep the money you'd lose on the spread before you gave them the rest in fees.

The other big problem with your theory is that it assumes that banks operate on some kind of "real-time" interest model, like if you went to a bank in the morning, deposited $1000, and then went back at the end of the day, you'd get $1000.01 back. It just doesn't work that way. Notice how they keep talking about how "funds deposited after 3:00PM will be available next business day"? The smallest operating unit of time for a bank is a day, minimum--you'd be trying to deposit and withdraw the money again before their systems actually realized the money's there. On top of that, they've all got rules, I'm sure, that say that newly deposited funds have to stay on deposit a minimum period of time--days or weeks--before they start getting credit for interest earned, exactly to prevent this kind of gaming.

Fees, spread, accounting timing--there are just all sorts of reasons that this couldn't work.

On the other hand, this is exactly what the whole "portfolio investment" approach is meant help manage. Instead of whipsawing _all_ your money back and forth between a high risk/return vehicle and a low one, you take _some_ of your money and leave it in stocks, and _some_ of your money and leave it bonds, T-bills, whatever. You kind of cover the bases "spatially", instead of "temporally".
posted by LairBob at 9:40 PM on May 27, 2007

Its not "doing nothing" when the market's closed. You're investing in a company, and that company is still doing business and experiencing events that are having an affect on it's value, regardless of your ability to buy or sell.
posted by duckstab at 9:52 PM on May 27, 2007

If you are a broker, why wouldn't you sell at 4pm and buy at 9:30am and make free money on your client's money (in the tunes of millions)? Being the broker eliminates the problem with fees.

As for the aftermarket trading, sure it goes up/down but it should generally at least even out, right? Stock markets have a tendency to go up.

Banks may not operate in real time, but that doesn't mean my money is worth nothing on the weekend. There is still a demand for money on the weekend/holidays/night. People are willing to pay a little interest for "cash now" so while this makes it trickier, it's theoretically still feasible.

Lastly, I agree the spread is an issue, but shouldn't markets nowadays be extremely efficient? So if you have a long weekend, I can make 0.0415% on the money assuming 5% interest rate, and still be ahead of the spread.
posted by tasty at 9:52 PM on May 27, 2007

A lot of larger companies (so I heard) invest in Asian markets during the off times. When you have billions in accounts, the pennies add up. Anything you'd gain by a riskless investment (which this effectively is) will be beaten up by fees and other investors with more cash than you taking advantage of this arbitrage opportunities. Frictionless investing only works in thought experiments and in Nobel winning economics models. In the practitioner world you need to be a little more clever.
posted by geoff. at 9:55 PM on May 27, 2007

Brokers can't do it for a whole bunch of reasons--even if you ignore the illegality of surreptitiously buying and selling a client's stocks for their own benefit, they also have to pay fees to the trading platforms. They don't pay $5 or $10 a trade like they charge _you_, but they still pay enough that it wouldn't work.

I think at the broadest level, though, you're thinking like a gambler who's looking for a scheme to beat the house. You're focusing on idealized issues like "my money isn't sitting still over the weekend", and "shouldn't markets be really efficient"? Those things may or may not be true, but the "house" is in a position where it's either allowed to ignore those issues, or it's able to build in a lot of real-world constraints, like fees, so that even if your assumptions _are_ true, the house is still going to end up winning in the long run. Your queries seem to keep setting aside practical constraints, but then asking why your ideas aren't practical.
posted by LairBob at 10:15 PM on May 27, 2007

Consider liquidity - you sell your stock at 4:00. Your brokerage probably closes at 4:30. You drive down, pick up your check (if they'll even have it for you that day) and drive to the bank. You sit with an account manager and open your account, with your check. The next morning you try to withdraw your money, but your deposit has not yet cleared. By the time your deposit clears and you get your money back, you've lost a million opportunities.

Money transfers do not happen in real time. You could look into something like E-Trade, where they have (fairly) low fees per trade and an account you can set up with them (interst bearing, even) that you can use to do pretty much what you are asking.

But in the long run, if you nickel and dime a brokerage to death, they will not do business with you. If you are making trades that are six digits and greater on a daily basis, you are not going to make them for $5 each, believe you me.

And the point about after hours trading, coupled with open/closing price differential is very poignant. Day traders usually lose their shirts for one reason: if you play the market like its a roulette wheel, you will lose you money like on a roulette wheel. One the other hand, the market is set up to prefer long term investing. Believe it or not, long term stability and growth is the goal of most companies who offer stock to the public market.

If you look at the minute to minute price of many stocks, you will see that even if you see a price you like right now, it will not be available twenty minutes from now (which is pretty much the soonest your trade can be executed - decide to sell, tell your broker, broker posts sell order, buyer sees sell order, makes offer, broker accepts offer).
posted by valentinepig at 11:38 PM on May 27, 2007

Actually, banks offer overnight deposits for large sums of capital, which pay interest. The money goes in and out daily. I worked in a department that handled these transactions. I don't recall any details, this was 20 years ago, at Security Pacific in LA.

This fact in itself offers nothing to support the idea of doing this with stockmarket funds, which has been shot down already. Just sayin'. (I do short-term trades, but it more often becomes days while I hold a position, rather than hours).
posted by Goofyy at 12:34 AM on May 28, 2007

Goofyy is correct; many mutual funds "sweep" uninvested cash to an overnight money market fund or similar cash equivalent vehicle daily in order to accrue more interest. That said, people have already pointed out why you wouldn't want to buy/sell out every day in order to do this.
posted by selfnoise at 4:31 AM on May 28, 2007

raf has it. Your "buy at yesterday's market close" order is an *offer* to buy and it's not guaranteed to find a seller. You can instead say "buy at market" but then you're not necessarily going to get the same price. You'll get the lowest price of the people who are offering to sell.

Your money is in fact out of the market for 16 hours a day and there are real effects for that -- even if theoretically no trading goes on off hours.
posted by cotterpin at 5:38 AM on May 28, 2007

Just for the sake of completeness, the efficient-markets explanation: If it was possible to make money on the market by cashing out at day's end and buying back in the next morning, then people would do so already, and the prices at day's end would lower and the next morning would raise to account for the gains expected overnight, bringing things back to zero net gain -- ie, knowing that people will be willing to pay a bit more to buy back in in the morning because they cashed out overnight, prices will go up, and they'd only stop going up when it's no longer effective to cash out.
posted by mendel at 6:10 AM on May 28, 2007

Notwithstanding the comments above regarding the impracticalities of this kind of trading (on a regular basis, at least), cashing out then buying back the following day is very occasionally used (in 8 years of trading, I think I did it twice), for tax purposes. The term for this kind of thing is "bed and breakfast". (link to explanation of UK tax benefits).
posted by dogsbody at 8:18 AM on May 28, 2007

As for the aftermarket trading, sure it goes up/down but it should generally at least even out, right? Stock markets have a tendency to go up.

I think that this is the main problem with your proposition. If you take your money out of the market for 80% of the time, even though it's nights and weekends, you'll miss out on a large part of the "going up," because as many have pointed out, prices aren't fixed while the market is closed. I don't know if you'd miss 80% of the growth, because I don't know if there's a correlation between when growth happens and when the market is open, but I'd bet it would still be a significant percent.
posted by daisyace at 8:56 AM on May 28, 2007

Here's an example, by the way. This is a chart of the last few trading days of Apple stock, intraday. On all but one of the days, the stock opened significantly higher than it closed the day before. You would have missed out on all that gain if you went through with your plan.
posted by raf at 11:49 AM on May 28, 2007