What is After Hours Trading?
After hours trading refers to the time outside regular trading hours when an investor can buy and sell securities. The main exchanges in the United States, NASDAQ and NYSE, hold standard trading sessions that start at 9:30 a.m. and end at 4:00 p.m.
After the end of regular trading, the exchanges allow trading to continue in the after-hours sessions between 4:00 p.m to 6:00 p.m. These sessions can sometimes extend to 8: 00 p.m. The trading is carried out through the Electronic Communication Networks (ECNs), which enables buyers and sellers of stocks to trade without anyone physically being at the trading floor.
Participants in After Hours Trading
After-hours trading was previously reserved for large institutional investors and wealthy families who were comfortable using unconventional trading methods. Trading volume was relatively low. Large investors dominated the after-hours market until the 1990s when ECNs were introduced.
ECNs opened doors for many more individual investors to trade outside regular exchange hours. The trading volume started increasing as more retail investors became familiar with the ECNs hours trading uses. Investors can participate in off-peak trading through brokerage firms such as Fidelity, Vanguard, TD Ameritrade, and Charles Schwab. The brokers may charge an additional fee for the service.
How to Find the Right After Hours Stocks
After hours trading provides investors with an opportunity to respond to major events and new information. These events may include late-night breaking news, company earnings releases, or political turmoil. Such trading allows investors to react to the new events as they occur, rather than waiting until the next day.
Many investors select stocks trading during the day with significant trading volume. Stocks with very low volume or that are unlikely to be affected by after-hours news may have very wide bid-ask spreads after hours.
Benefits of After Hours Trading
After hours trading provides added convenience that may not be present during the day trading session. During off-peak times, there may be significant news events, such as company earnings releases, that are reported outside regular trading hours. Traders can then use this information to trade immediately instead of waiting until the next day to take a position.
2. Pricing opportunities
Although after hours trading is often characterized by highly volatile stock prices, traders can benefit from appealing stock prices during off-peak hours. For example, when a stock is affected by a news event, a trader can take immediate action to benefit from placing a trade before the next day’s trading session. This can be a major advantage if a stock’s price only temporarily moves to an advantageous level during the after hours session.
3. Fresh information
Off-peak sessions provide investors with an opportunity to trade new information released after the close of the normal trading day. The information may have a short-lived effect that traders can react quickly to, before the next trading session.
Risks of After Hours Trading
While traders can take advamtage of profit opportunities, there are several risks associated with trading during off-peak hours:
1. Lack of liquidity
The majority of trades are conducted during standard trading hours. This means that there is greater demand and supply for stocks that investors want to trade. Trading during off-peak hours is often characterized by low liquidity.
2. High competition
Individual investors may be at a disadvantage after hours. They are forced to compete against large institutional investors with large amounts of capital to invest in stocks. Also, institutional investors hire professional traders who are more skilled in executing trades than most individual investors.
3. High volatility
There may be larger price fluctuations, as compared to regular exchange trading sessions, since off-peak trading volume is usually low.
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