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So the stock goes up overnight because of the risk that... the stock will go down overnight? Surely if the risk was real, the stock would actually go down some

by dTal 4y ago

So the stock goes up overnight because of the risk that... the stock will go down overnight? Surely if the risk was real, the stock would actually go down sometimes, and cancel out the "free lunch", and on average there would be no effect to explain!

notahacker 4y ago
The risk is real, but many people are risk averse enough to be prepared to take a small loss [or lesser profit] to avoid risk of a bigger loss in basically every market anywhere - that's why insurance is a thing! And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...
Panzer04 4y ago
"Risk" as markets consider it is more about volatility. The higher the volatility, the more likely you are to make (or lose) money. People being as they are, volatility is usually perceived negatively and it causes people to be less willing to pay for volatile assets. Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises). If you take that volatility risk, you are rewarded for it with higher returns, on average :)
helsinkiandrew 4y ago
Sometimes it does go down - I think the linked article says you need to be buying and selling billions of dollars of stocks for a long time to make the profit. But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.

by dTal 4y ago

notahacker 4y ago

The risk is real, but many people are risk averse enough to be prepared to take a small loss [or lesser profit] to avoid risk of a bigger loss in basically every market anywhere - that's why insurance is a thing! And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...

Panzer04 4y ago

"Risk" as markets consider it is more about volatility. The higher the volatility, the more likely you are to make (or lose) money. People being as they are, volatility is usually perceived negatively and it causes people to be less willing to pay for volatile assets. Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises). If you take that volatility risk, you are rewarded for it with higher returns, on average :)

helsinkiandrew 4y ago

Sometimes it does go down - I think the linked article says you need to be buying and selling billions of dollars of stocks for a long time to make the profit. But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.