After-hours trading refers to that period of time after the market has closed when investors can buy or sell securities outside normal trading hours. Both Nasdaq and the NYSE (New York Stock Exchange) usually operate between 9.30 and 4:00 PM. After-hours trades can be completed via electronic exchanges anytime between 4 and 8 PM Eastern Time. With the help of these electronic communication networks (ECNs), potential buyers get matched with potential sellers without the use of a traditional stock exchange.
Why Trade During The After-Hours Session?
After-hours trading was utilized primarily by business investors until the 1990s when ECNs came into inception. An ECN doesn’t only provide individual investors with a chance to interact electronically, but it also allows large institutional investors to interact anonymously thus hiding their actions.
With its escalating popularity, extended trading has now become a norm in most investor dealings. In fact, several brokers now provide after-hours trading, including TD Ameritrade, Charles Schwab, as well as Fidelity. Be sure to go through the disclosure documents provided by your brokerage company before you begin trading in the after-hours market.
After-hours trading is often divided into two different categories; post-market and pre-market trading hours. Most stock exchanges often operate post-market trading that runs between 4 and 8 PM. On the other hand, pre-market trading occurs in the morning before the market opens- before 9.30 AM.
Understanding After-Hours Trading
Normal market hours usually start from 9:30 AM and close at 4:00 PM. After hours trading refers to a session that takes place after the market closes. During this time, investors can place different orders to purchase or sell the stock. There’s also another session that occurs prior to the market’s opening called the pre-market session.
So how are trades conducted after the major exchanges are closed? Typically, extended hours trading is aided by computerized order matching systems referred to as Electronic Markets, which could either be Electronic Stock Exchanges or Electronic Communications Networks.
Electronic markets refer to those services that match up buy as well as sell orders. For instance, if you make an order to purchase 200 shares at USD 45, the computer performs some automatic searches to see if there’s an order that sells at least 200 shares for USD 45 each. If there’s, the trade is completed, if not, the order won’t be filled.
What’s Different?
However, it’s important to note that there are some differences that exist between regular trading sessions and after-hours trading. For instance, in the after-hours trading session, not all orders are accepted. Business dealers can only utilize limit orders to purchase, sell, or short. Stop limit orders as well as orders with special conditions like all-or-none, fill-or-kill, and immediate-or-cancel can’t be placed. Besides, after-hours is only perfect for the particular session in which they’re placed and don’t really carry over into another session.
While technology can strongly influence the regular trading day, there might be more lags as well as delays during after-hours trading, which could prevent your trades from going through.
The Benefits
Though after-hours trading comes with numerous risks, there are a couple of benefits, too.
- Trading on real-time information- conducting business after the normal market closes enables you to react promptly to breaking stories as well as fresh information before following day’s market opens.
- Better ricing opportunities – though volatility is a common risk associated with after-hours trading, you might find some attractive prices during this time.
- Increased convenience –most investors prefer trading at off-peak times as it provides them with added flexibility.
- Quick interaction with technical signals- for business people who depend on technical-based trading strategies, after-hours trading sessions can be highly beneficial. Most technically-oriented traders utilize closing price as well as volume figures to calculate business signals. After the trading signal is produced, the trader can instantly place the trade in the after-hours session without necessarily having to wait till the next day when prices could be significantly different than they were during the end of the regular session.
Possible Risks and Dangers
The development of after-hours trading provides investors with the opportunity to reap great benefits, but you should as well be informed of its inherent risks plus dangers.
- Low liquidity: During regular hours, you’ll find that there are so many buyers and sellers. But during after-hours trading, there’s a greater possibility that there’ll be minimal trading volume for your stock. And this could make it difficult for you to convert shares into cash.
- Wide spreads: A lower trading volume might result in wide spreads between the bid and ask prices. Thus, it may get harder for people to get their orders delivered at a favorable price.
- Increased competitiveness: Whilst investors now have the chance to trade during after-hours, the truth is that they should be able to compete against big institutional investors who’ve access to more resources than other individual investors.
- Non-consolidated quotes: During regular sessions, the quotes offered are consolidated and represent some of the best prices available across all trading platforms. In the after-hours market, however, the quotes aren’t consolidated. So, you may only see prices from one trading venue and this might not reflect the real prices exhibited in other electronic trading systems.
- Unpredictable prices: The prices of certain securities traded in after-market hours might not reflect the cost of those securities at the open nor close of the normal market session.
- Volatility: As compared to regular-hours trading, the after-hours market is thinly traded. So, you’re more likely to incur severe price fluctuations in after-hours than normal trading hours.
- Lack of index value calculations: For traders specializing in certain index-based products, the dissemination of index values or lack of calculations in the after-market could greatly disadvantage an individual investor, making them less competitive in the market. Professional usually have access to sophisticated proprietary systems can quickly help them calculate index values based on specific stock prices.
The Bottom Line
Whilst there can be numerous benefits to investors plus traders partaking in after-hours market trading, the risks are potentially high. Anyone participating in such trading activities should exercise caution as the risks are very real. Most brokers now provide after-hours trading. So, before making any investments, start by investigating the available options.