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, i.e., NASDAQ and NYSE, hold standard trading sessions that start at 9:30 a.m. and ends at 4:00 p.m.
After the end of regular trading, the exchanges allow trade-ins to continue in the after-hours sessions between 4:00 p.m to 6:00 p.m, and can sometimes extend to 8: 00 p.m. The trading is carried out through the Electronic Communication Networks (ECNs), which allow buyers and sellers of stocks to trade without physically being at the trading floor.
Participants in After Hours Trading
Up to the 1990s, after-hours trading was reserved for large institutional investors and wealthy families who were confident in using unconventional trading methods. During the period, the trading volume was relatively low. The large investors dominated the after-hours trading market until the 1990s when the ECNs were introduced.
The ECNs opened doors to individual investors who can now trade without necessarily being on the exchange’s trading floor. The trading volume started increasing as more retail investors became familiar with the ECNs, which are the main method that after hours trading uses. Investors can participate in off-peak trading through brokerages accounts such as Fidelity, Vanguard, TD Ameritrade, and Charles Schwab. The brokers may charge an additional fee for the service.
How to Find the Right Stocks During After Hours Trading
After hours trading provides investors with an opportunity to respond to major events and new information. The events may comprise late-night breaking news, company earnings releases, political turmoil, company misfortunes, etc. Such a form of trading allows investors to react to the new events as they occur, rather than waiting until the next day’s trading to open. The events can provide an investor with a list of stocks to watch for any movements and a plan to execute a trade when an opportunity presents itself.
The other strategy is to select stocks trading during the day with significant trading volume. The investor should prepare a list of all possible stocks to trade and then narrow down to a smaller number of stocks with the highest returns. Some of the stocks that should be removed from the list include those with less than one million average daily volume and those without significant trading activities during the day trading session.
Benefits of After Hours Trading
The following are some of the 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 revenue releases, economic indicators reports, and breaking news 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 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 the trade before the next day’s trading session since the price jump or drop may only last for a short duration.
3. Fresh information
After hours trading provides investors with an opportunity to trade new information that is released after the close of the normal trading session. 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 the opportunity to profit from after hours trading, there are several risks associated with trading during off-peak hours:
1. Lack of liquidity
Majority of the trades are conducted during standard trading hours, and it means that there is greater demand and supply for stocks that investors want to trade. The low liquidity results from a lower number of stocks to trade during off-peak hours, which makes it difficult to convert shares for cash.
2. High competition
After hours trading was mainly a preserve of large institutional investors, and individual investors were allowed later on in the 1990s. It means that individual investors are forced to compete against large institutional investors and wealthy families with large amounts of capital to invest in stocks. Also, institutional investors hire professional traders who are more skilled in executing trades than individual investors.
3. High volatility
After hours trading is affected by higher price fluctuations compared to normal trading sessions since off-peak trading volume is usually low.
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