What After Hours Trading Entails
After hour trading refers to the period of time after the normal working hours that one can trade on a major exchange.
It is the window period that one can trade after the market closes. The term after hours trading can be easily interchanged with ‘extended hours trading’ or ‘after-hours market.’
The regular trading times on most exchanges are 9.30am to 4.00p.m. Thus, after hour trading occurs after 4.00p.m or before 9.30a.m. Specifically, it takes place between 8:00 am -9.15am in the morning. In the afternoon, it takes place between 4.15pm to 8.00pm. There are some instances where pre-market trading can occur at 6.00am until the market opens.
Institutional Investors use of after hours trading
After hours trading was normally a reserve of institutional investors. It was greatly enhanced by the Electronic Communications Networks (ECN), which matched buyers and sellers outside the mainstream stock exchange.
It’s an electronic interface that allows investors to interact. This interaction is usually anonymous and was preferred by large institutional investors since they wanted to hide their trading actions.
In present time, after hours trading is available to most investors who can access it through brokerage accounts.There are some associated risks and advantages to after-market trading:
Advantages of after hours trading
After-market trading provides some form of trading convenience. This is true specifically where a trader prefers to trade at off-peak hours. Traders are not tied down to the regular trading hours.
It has also been noted that specific events that have a direct bearing on the market happen after regular trading hours. For example, press releases and company earnings releases. Most companies release their quarterly earnings after 4.00 p.m.
Thus, after trading hours can provide a trader the flexibility to trade swiftly after the release of such news during off-peak hours.
You can also identify stocks that are highly volatile by analyzing the after- hours volume of trades. As earlier mentioned, most companies’ earnings and news releases occur after market close.
Stocks that have not had a high volume of trade during the normal trading session are unlikely to trade at high volumes after market close even after a major occurrence.
The risks of after hours trading
After-market trading is normally done by few traders. This is because the majority of traders may have either bought or sold during the normal market time. Hence, volumes of trade may be low during after-market trading.
This will bring about less liquidity or a lack of it altogether. Low liquidity has further implications. It contributes to wide spreads between the bid and ask prices. This means that traders will have their orders executed at unfavorable prices.
Another risk is in competition. After-market trading as earlier mentioned, was a reserve for large institutional traders. But presently, individual investors can trade after-hours. The implication here is the competition that will rise. Institutional investors have the edge over individual investors owing to their access to more resources.
After-hours trades are also characterized by high volatility. After-market trading records the highest price fluctuations than trades in regular hours.
How common is after hours trading ?
After-hours trading is itself not bad. However, it does not resonate with many investors. This is due to the risks involved. If you’re uncomfortable with it, just trade during normal hours.
The decision to engage in after-hours trading will solely rely on an investor’s:
- Risk tolerance
- Style of investment
It should also not be confused with late day trading; which is quite distinct. It involves trading mutual funds in the after-market hours. It is illegal in some sense since no trader is permitted to trade a mutual fund after a specific time of day when its price is constant.