After-hours Trading: What an investor should know about the trading after the daytime.
Contrary to the belief of some, trading does not stop even after the ringing of the closing bell. Trading continues, albeit with slight differences from its daytime counterpart.
As a beginning investor, even you already know the basics of the stock market, stock screeners, and such, there are still a lot of things you need to discover and learn. One such thing is the trading hours or sessions.
Most people know that trading happens on days, and that is correct. A trading session is the part of the day in which trading activities take place. Most trading occurs in the daytime, and one trading session equals one business day. These sessions start upon the opening of the market, which is signaled by the opening bell. By the same process, a trading day or session ends upon the ringing of the closing bell.
But trading does really occur and stop at a particular hour? Not quite. Most and not all trading happens in the daytime. Contrary to the belief of some, trading does not end even after the closing bell. This might be news to some, but trading is indeed continuously occurring after the daytime.
Trading is not restricted by the closing bell; traders can continue trading stocks and other securities after the session ends or after the business hours are finished. This trading that occurs after the regular session is called after-hours trading. Since it is separated from the regular trading day, naturally, there are slight differences between the two.
As a beginner, these differences might be a little bit confusing; after all, aftermarket trading is quite a confusing concept. But if you want to find out more about aftermarket trading or after-hour session, how it works, how you can take part in it, what to take note of then, continue reading.
Market Hours Schedule
Stock exchanges follow a fixed market-hours schedule. Most trading occurs during the daytime session upon the ringing of the opening bell. During this time, investors can purchase and sell securities such as stocks. A regular schedule is like the New York Stock Exchange or NASDAQ trading session that opens or starts at 9:30 a.m. (ET) and ends or closes at 4 p.m. (ET).
But after-hours trading does not follow this regular schedule. Instead of occurring between these hours, after-hours trading begins after the ringing of the closing bell.
What is After-Hours Trading?
After-hours trading is pretty much self-explanatory. There is nothing much on the meaning as it is easily comprehensible. In the simplest definition, after-hours trading is the trading that occurs after the regular session of the stock exchange.
After the market closes, trading does not cease to occur. The immediate hours after the market closed are the hours related to the operation of after-hours trading. During these times, investors can buy and sell securities though the market is closed.
Some might think that after-hours trading is shady since it occurs after the regular trading session, but it is not. It can be viewed as an extended session for traders that cannot make trades during the regular hours. Another reason why trading continues after the market closes is that some investors might be looking to get into or out of positions (typically in relation to stocks that have millions in volume.)
Unlike the regular session that uses the traditional stock exchange, after-hours trading employs an electronic communication network to match potential buyers and sellers. This technology allows investors to trade though there is no one present physically on the trading floor. In addition, the volume of the trades is also different. The volume of securities being traded during the after-hours session is thinner, possibly because of the few numbers of active traders during these hours. But this is not the way things would always be; if something happens in a company or there is significant economic news, the volume might experience an up.
Aside from the volume, spreads (difference between the bid and ask price) are also different (wider to be precise) during the after-hours.
How does after-hours trading work?
After-hours trading happens after the market closes. After the end of the daytime session, at 4 p.m., after-hours trading starts and will end at 8 p.m.
The orders of traders that participate in after-hours trading run through ECNs that match the sell and buy orders.
Since the market is closed, all orders must be limit orders to be executed. Additionally, these orders are only “valid” for that specific after-hours session. If you are still interested in a particular stock on the following day, you need to make another order when the trading starts. Aside from limit orders, investors also need to be clear on the electronic securities exchange and order types.
Who takes part in after-hours trading?
Decades ago, after-hours trading was mainly reserved for investors representing institutions or those from wealthy families. These individuals are those willing to use unconventional trading methods to profit despite the relatively low volume. These wealthy and big personalities dominated after-hours trading until the mid-1999 when ECNs became widely accessible and available for the average retail investors.
ECNs open the door of after-hours trading doors to the average investor. In addition, more wealthy institutional investors embraced it since it let them interact anonymously. These opportunities increased the popularity of after-hours trading, and thus the volume of securities being traded increased.
Today, after-hours trading is still enjoying popularity. Moreover, it is now accessible for more people. Investors can now participate in this through a number of brokerage firms that offer after-hours trading, such as TD Ameritrade, Charles Schwab, Fidelity, Vanguard, etc.
How can I participate in after-hours trading?
Since many brokerage firms offer after-hours trading, participating in it is relatively easy. To execute an after-hours trade, you need to go to your brokerage account. After going to your brokerage account, you need to find and choose the stocks you want to purchase. Place a limit order similar to how you usually do it in a regular trading session. After that, the broker would do the rest.
The broker will then send your order to the ECN that the firm utilizes for after-hours trading. The ECN will then match your order to orders present in the network. If there is a match, then the trade will be executed.
Note: Before executing the trade, check if the broker charges extra fees for this or not.
Risks and Benefits of after-hours trading
After-hours trading is not without risk. Like in the regular session, after-hours trading also exudes risks that traders, brokers, or investors should carefully observe and manage. On the other hand, it has benefits in-store as well.
Risks of after-hours trading
Liquidity issue. During a regular session, there is enough volume for trades since more people participate in it. On the other hand, fewer active traders participate in after-hours trading, which means thinner volume. Since the volume is thinner, it is harder to convert the shares into cash.
Bias to Limit Orders. Limit orders are the only available orders since one cannot do market orders because the market is closed. The low volume and the bias towards limit orders might cause your trade not to be filled.
Computer Delays. Similar to online trading, investors may experience delays when doing after-hours trading. In fact, there are times when it is not a simple delay since there are times where your order will not be executed.
Order handling. Order handling is one of the differences between regular day trading and after-hours trading. Some rules being adhered to when handling orders in the former do not apply to the latter. Thus, be sure to check it with your broker.
Wide Spreads. The thin volume of trades causes another risk or problem for the investor. The lack of volume means a wide spread between the bid and ask price. As a result, it may become hard for the investor or trader to execute or achieve a favorable and profitable price.
Tough Competition. Many brokerage firms made after-hours trading available for the average investors, but it does not mean that the “field” is leveled. It opened opportunities, but the competition is still there. Individual investors who enter after-hours trading face competition with wealthy or institutional investors who have access to vast resources.
Volatility. Price fluctuations are not surprising in after-hours trading as a result of the thin volume. Some of the price fluctuations that an investor sees in after-hours trading are even higher than regular sessions. In addition, big news about the market and economy also contributes to the volatile prices.
· Actions based on new information. After hour-trades do not need to wait for the market to open to incorporate the latest news in their trading moves and strategies. This allows them to react quickly even before the market opens and trade as soon as the regular session starts.
· Some Good Prices. Though there is more volatility in after-hours trading, traders might still find some good prices here.
Convenience. After-hours trading adds some flexibility, especially to those investors that prefer trading during off-peak times.