After-Hours Trading: Understanding Risks & Benefits for Traders

Written by 
Polina Median
/
November 29, 2021

Answer: Samsung

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pros & cons of trading when the exchanges are closed - photo

After-hours trading may seem too advanced for a beginning investor. However, with a wise and thought-out approach, it’s a great way to expand anyone’s trading opportunities.

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In this article, we will answer the question “What is after-hours trading?”, discuss why stock market after-hours trading is considered a risky activity and what it can do for a trader. In addition, we will consider the essence of after-hours trading and some real examples of famous companies. 

What is After-Hours Trading?

After-hours trading is trading in the stock markets after the market closes at 4 p.m. in the United States. This allows trading securities after the market is closed with no further price movement.

Can you buy stocks after hours? Yes. Investors are allowed to trade stocks, even if the market is closed, i.e., outside of business hours, thus reacting to the latest news and events related to stocks and making profits before the market reopens the next day.

How does the After-Hours Trading Process Work?

How to trade after hours? Let's take a look at the process.

Stock markets in the U.S. open at 9 a.m. and close at 4 p.m. The session lasts from 4 p.m. to 8 p.m., during which investors can trade securities without any effect on prices.

Here are some important facts about trading after hours:

  • Among high-net-worth individuals and risky organizations such as mutual funds, after-hours trading is more popular than regular trading.
  • After-hours trading is more common among high-risk investors who want to risk their investments for greater returns.
  • There are certain rules and regulations that apply to after-hours trading compared to regular trading hours in terms of the type of orders taken and the presence or absence of market makers.

If you place after-hours orders per share only after the market closes, the stock will trade at the opening price the next day, but only after the market reopens.

When trading after-hours, the trader must consider that all transactions will not be made through the exchange but directly between the parties. This is known as over-the-counter trading. To do this, you need to find another trading partner willing to enter into a contract with you. Your broker will help you with this.

Can you sell a stock after hours? Of course, you can make transactions both to buy and to sell assets.

If you want to exchange warrants after hours, the relevant issuer usually provides you with the appropriate trading rates. All of these rates, of course, are constantly changing depending on supply and demand.

However, unlike official exchange trading, there is usually less liquidity and fewer securities in after-hours trading. Typically, large price fluctuations are possible. Therefore, it is essential to set a limit. The price at which the exchange trade ended will usually be different from the regular exchange price.

Example of trading after hours

We've already figured out the answers to “What does after-hours trading mean?” and “Can you buy stocks after hours?”. Now let's look at such a trade using LinkedIn as an example.

On Thursday, February 4, 2016, the U.S. company LinkedIn announced its annual numbers after hours. Investors received them poorly, and at 22:05, the stock began to fall. Overall, the price loss after the trading day was 30%. 

linkedin chart fall delisted photo

Most brokers offer their clients the opportunity to participate in pre-and post-market trading, which gives investors the option to trade and manage positions. If you don't have this option, as is often the case with many other brokers, you can wait and react only at 3:30 p.m. on the next trading day.

Looking at the trading volume on Thursday, February 4, we can see that on that day, during market hours, just over 5 million shares were sold. However, in the aftermarket hours, the trading volume for the day was almost three times higher(right corner). The reason is after-hours trading, as almost 40 million shares were sold during that time, and the trading volume was twice as much as in normal hours.

Now let's look at the after-hours price reaction. The LinkedIn stock was trading slightly below $190 at the end of normal trading hours on Thursday. On Friday, Feb. 5, at 2:30 p.m., an hour before Wall Street opened, the LinkedIn stock was trading more than 30 percent lower than the day before. The price was just over $130. When the stock opened, the discount on the stock was 42%.

Having the ability to manage your positions outside of normal trading hours can make a big difference in the return on your stock portfolio. You don't have to think whether you should buy the stock after hours and wait for the next day; when the U.S. stock exchanges open at 3:30 pm, you can start trading at any time. Many brokers allow you to do this.

8 Risks and Pitfalls of After-Hours Trading

If you’re still wondering, ‘Should I buy stocks after hours?’, keep in mind that many traders use the opportunity to trade before the official opening of the market and after the market closes to quickly react to news events and other factors that arise outside business hours. 

However, such activity is associated with an increased short-term risk. 

In this regard, the SEC warns investors of the following risks:

  • Not being able to see or use quotes. Some brokers display quotes only within their trading system, not showing them to other ECNs.
  • Lack of liquidity. During after-hours sessions, the number of traders is much smaller, so liquidity is significantly reduced.
  • Increased spreads. A decrease in trading activity leads to an increase in spreads, making it difficult to execute orders at acceptable prices.
  • Volatility. Price fluctuations during this time can be greater than during the official session, especially during news releases.
  • Price uncertainty. Stock prices in pre-market and post-market trading may differ from prices during the official trading session.
  • The tendency to limit orders. Many ECNs accept only limit orders and do not accept market orders.
  • Competition with professional traders. The pre-market and post-market are traded mainly by professionals who have access to more data and insights and are generally more experienced.
  • Computer delays. Technical support for the trading process deteriorates after hours, so the trader may encounter delays in executing his orders.

The price of Nvidia Corp. (NVDA) in February 2019 is an excellent example of how the after-hours trade and what dangers are associated with it. Nvidia released its quarterly results on Feb. 14.

The stock was met with a sharp jump in price, rising to nearly $169 from $154.50 within 10 minutes of the news.

Trading volume was steady for the first 10 minutes and then quickly declined after 4:30 pm. About 700,000 shares were sold in the first 5 minutes of trading, and the stock jumped nearly 6 percent. However, trading volume dropped significantly, with only 350,000 shares sold from 4:25 to 4:30. By 5:00 p.m., trading volume had dropped to 100,000 shares, and the stock was still trading at about $165.

However, everything changed the following day when all market participants got a chance to evaluate Nvidia's results. Between 9:30 and 9:35 a.m., nearly 2.3 million shares were sold, more than three times the amount sold in the first minutes of afternoon trading the previous day, and the price dropped from $164 to $161.

The stock continued to trade lower for the rest of the day, closing at $157,20. This was only $3 above the previous day's closing price after rising nearly $15 in after-hours trading.

After-Hours Trading: Benefits for a Trader

Listed below are some benefits of trading after hours:

  • Convenience. After-hours trading is more comfortable for investors who cannot trade during regular market hours.
  • Ability to take advantage of fresh data. Off-peak sessions provide investors with the opportunity to trade new information released after the close of the regular trading day. The information can have a short-term effect that traders can react to quickly before the next trading session.
  • Technical analysis. One day, you can analyze the stock chart and react to it before the market opens at 9:00 a.m. the next day.

As you can see, there are advantages to trading after hours.

Some might think that after-hours trading is a bad idea. But if you take a closer look, you’ll see that it can provide you with good earning opportunities.

Final Thoughts

In this article, we've provided you with important information about what after-hours trading is, why trading during this time is very risky, and how it can turn out for a trader. We hope now you know the answer to the question 'Is it good to buy stocks after hours?

In addition, we considered the essence of trading after hours and gave real examples. And, of course, we have considered the benefits of such trading.

However, all this information is not enough for profitable trading. You need to develop your skills and learn even more valuable information.

FAQ

Can I buy stocks after hours?

Trading after hours in the U.S. takes place after the market closes when investors can buy and sell securities outside the normal hours. After-hours trades are completed through electronic communication networks (ECNs), which match potential buyers and sellers without using a traditional stock exchange. So traders have the option to trade.

Should you buy stocks after hours and on weekends?

Technically, trading in the stocks is available on weekends because trading these days creates the so-called GAP. However, most banks, stock exchanges, and quotation providers (Reuters, Bloomberg, etc.) stop their activities from 01:00 on Saturday to 01:00 on Monday. Therefore, it is better not to take the increased risks of not trading when the market closes.

Is after-hours trading legal? How dangerous is such trading for investors?

Yes, it is legal. Many beginners question, “Is it bad to buy stocks after hours?” but that’s totally safe; just another type of trading. During after-hours trade, the volume of liquidity decreases significantly, the work of dealing centers and brokers becomes less profitable, so most of them also decide to work only during market hours, not on weekends.Some brokerage companies do execute after-hours orders on weekends. Still, these transactions are subject to higher commissions and the currency pairs available on weekends have almost zero volatility and liquidity. Such conditions are suitable for individual market participants.

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