What an interesting question! Why do the stock markets even close? I wouldn’t be surprised if it were to keep the blood pressure of stockbrokers at a manageable level. Could you imagine the floor of the New York Stock Exchange if the markets were open around the clock? We’d have a coffee and Red Bull shortage on Wall Street! But in all seriousness, the stock markets close for several reasons. The hours of the US stock markets are 9:30 AM to 4:00 PM in the Eastern Standard time zone.
Table of Contents
- Why Does the Stock Market Need to Close?
- What About the Options Market?
- Advantages to the Stock Market Closing
- Disadvantages to the Stock Market Closing
Why Does the Stock Market Need to Close?
1. Provide Adequate Liquidity
What does this mean? The market needs to settle after they close as market makers provide sufficient liquidity that enables fair pricing. Every transaction that’s made on the market needs time to settle.
If we don’t have adequate liquidity, the market would be a chaotic place to trade. These are more technical issues that don’t resonate with the everyday trader. But without this, the market wouldn’t be able to function as efficiently as it does.
2. Mitigate Trader Panic
This sounds funny, but it’s true. There’s a reason why companies often time earnings announcements after the market closes. If investors don’t like what they hear, the liquidity is much lower after the closing bell.
Even if they sell their shares, it won’t have as significant of an impact on the stock price as if it happened during trading hours. We all know how reactionary traders are, so publicly traded companies need a time when they can drop news without the stock completely tanking.
3. Give Everyone a Break!
The stock markets need workers to operate and run smoothly. It’s not just brokers who are on the floor; an entire army of staff helps run things efficiently. We need to give these people a break, too! The stock market has become a virtual and digital entity now that we can trade from computers and phones. We often forget that real people are still trading and working at the various exchanges daily.
What About the Options Market?
You might have read headlines last year about the SEC looking into having the options market open all day. The CBOE, or Chicago Board Options Exchange, has opened up trading of S&P 500 and VIX options hours per day from Monday to Friday. Unfortunately, for options traders who are night owls, individual companies cannot be traded outside of normal trading hours.
Since the price of options contracts relies on the underlying asset’s price, the two markets must trade simultaneously. Broader index funds like the S&P 500 are safer to trade outside normal trading hours since the index is not very volatile. A 24-hour options market would be absolute madness for traders and for market makers as well! So this is an answer to why the stock market closes.
What About the Crypto Market?
The crypto market is a completely different beast, though. These massive trillion-dollar markets are open 24 hours daily, seven days weekly, and even on holidays. Why can the crypto markets stay open for so long?
Well, most cryptocurrencies are not tied to an actual business or company. Since stocks are tied to the performance of real-life companies, it makes sense that they have business hours to trade in.
But for the most part, the crypto markets are unregulated and decentralized. This means that they are available on a global scale to countries all over the world.
This is a major reason they are open around the clock so that people in every time zone can participate in trading cryptos. If crypto like Bitcoin is truly going to become a global currency, then having a 24-hour market will help those in markets outside of the US.
If you have traded in cryptos, you’ll also know that the markets behave differently depending on the time of day. During our US trading hours, it is primarily North American traders.
During the overnight session, Europe and Asia are involved in crypto trading. Different trading strategies for different markets with different socioeconomic infrastructures. That’s what makes the crypto markets so wonderful!
Advantages to the Stock Market Closing
Well, every cloud has a silver lining, right? There must be some advantages to the stock market closing every day. Aside from the reasons I already covered above, there are advantages for companies and traders to see the market close. As someone who follows the markets daily, I am thankful when 4:00 pm rolls around most days! It gives me a chance to unwind and enjoy other things in life.
1. Allows Traders to Reset
This is so important. The stock market is a great way to invest and make money, but following the ebbs and flows can be exhausting daily, particularly if you are a day trader or swing trader! Can you imagine day trading 24 hours per day? Not only would this prevent some traders from ever sleeping, but we would see many accounts completely emptied. Having that 4:00 pm closing bell also limits traders from making mistakes that could be costly. Everyone always imagines making more money if the markets were open all day. But don’t forget there are just as many bad trades as you can make!
2. Trading Near the Bell
A viable trading strategy exists for trading right after the opening and directly before the close. Trading Near the Bell allows traders to take advantage of some reasonably steady patterns during most sessions. If it is a green day, we often see a bit of a pullback by the close as traders take profits off the table. On a red day, we often see a minor push before the close as traders gobble up shares at a discount. Either way, Trading Near the Bell is a strategy that can only happen when the market has set hours.
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Disadvantages to the Stock Market Closing
For every advantage there is, there will always be disadvantages as well! Let’s look at some disadvantages of the market being limited to six and a half trading hours every business day.
1. Difficult for Workers
Those who want to follow the markets and trade during market hours might have trouble doing so. Why is this? 9:30 AM to 4:00 PM is a standard workday for most jobs!
This makes it difficult for anyone wanting to be a full-time trader or at least more than a part-time trader to work a 9 to 5 job, too! It is a minor complaint, for sure. And for 95% of investors, it’s better to leave your money in the market and let compounding and time do the work.
2. Limits Other Countries from US Markets
Here’s a big one. Even though many major countries have their local stock markets, the US markets are the biggest market in the world. This attracts investors from all over the world to want to invest in US companies. But, when you live in Asia or Europe, the US markets aren’t always the friendliest times to trade.
It can’t be helped, but it is still interesting to think about an all-day market in which residents in other countries could freely trade. It’s why the crypto markets have also become so popular in international markets!
Final Thoughts: Why Does the Stock Market Close?
Why does the stock market close? It’s a question that has been asked repeatedly by investors for decades now. I think these traders do not know what they are asking for! Imagine tracking your favorite stocks all night long. I am sure many traders would not be able to sleep at night. Either they couldn’t sleep, or we would see a mass sell-off of names as people sell their positions before going to sleep. This would theoretically protect them from the downside of a market crash in the middle of the night!
Aside from our sanity, the markets must close for reasons like liquid balance. There is a mechanism and method to its madness. If you want to trade all night long, I suggest you check out some international or crypto stock markets instead!