After-hours trading can be intriguing during breaking news, but it may also involve more risk.
Camping tents erected in parking lots. Dangerous stampedes. Fistfights over Beanie Babies.
Before e-commerce, Black Friday could be intimidating. And if there was a Christmas toy that every kid had to have that year, the competition was fierce.
These days, retailers usually still make their highest profits around Black Friday, but the overwhelming line the day after Thanksgiving is not as impressive in person as it used to be. Between the extension of Black Friday deals over the weekend and the rise of online shopping, there are now more convenient options for consumers than the predawn crowds at retail stores.
Although after-hours trading is not always as popular as Black Friday’s e-commerce sales, the rise of electronic trading has also offered investors more opportunities to trade. And if a company announces the stock market equivalent of Tickle Me Elmo after hours, investors may not necessarily have to wait until 9:30 a.m. the next day to complete their Christmas shopping.
Still, trading after regular market hours might involve more risks than traditional hours. While some investors may find after-hours trading more suitable for their goals, others might be wary of the limited liquidity.
UP AT ALL HOURS
After-hours trading refers to the period outside of regular market hours when investors buy and sell securities. Instead of a traditional stock exchange, buyers and sellers rely on electronic communication networks to complete their trades.
In the U.S., there are three periods where trading typically takes place:
- Pre-market from 4:00 a.m. to 9:30 a.m. ET
- Regular market from 9:30 a.m. to 4:00 p.m. ET
- Post-market from 4:00 p.m. to 8:00 p.m. ET
Generally, “after-hours trading” refers to the post-market trading hours, though sometimes people informally group pre- and post-market hours together.
COUNTING PENNIES INSTEAD OF SHEEP
Some traders prefer after-hours trading because of their personal schedules. Whether they live in a different time zone or if they are keeping a day job, trading outside traditional market hours may be one way to balance their priorities.
In many cases, though, investors supplement after-hours trading in addition to regular market hours. News events, such as earnings reports, sometimes reach the public after the market closes. These may motivate investors to either immediately buy or sell stocks related to the news, depending on how provocative the event may seem to them.
Even for those who don’t intend to instantly trade as the news breaks, monitoring the market reaction during after hours may be useful. Traders can use this period to follow the trends and evaluate their plan in anticipation for regular market hours.
However, traders should be wary of using after-hours trading as an indicator because performance during after hours doesn’t necessarily determine performance during normal trading hours. Since there are fewer buyers and sellers after hours, a stock price may plummet after hours before rising after 9:30 a.m. once the major institutional investors have a chance to contribute.
BURNING THE MIDNIGHT OIL
With more hours to trade in a day, investors may feel like there is more opportunity. However, after-hours trading tends to have more risk than traditional market hours because there is less liquidity. Spreads may be wide during after hours since there are fewer shares to trade.
Since there is less liquidity and wider spreads, the price action may be more dramatic. Fewer shares in the after hours may have a more significant impact on a stock’s price.
With higher volatility, traders may adjust their strategy in contrast with traditional market hours, such as implementing more limit orders. Another strategy is considering the foreign exchange (forex) market, trading currencies with a long-term focus of dollar strength rather than faster trade reactions.
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