In everyday life, shops and retailers have their set opening and closing hours that dictate when and where you can buy their goods and services.
With the stock market, things work slightly differently. While there are set opening and closing hours, there are still trading opportunities to be had after the market has slammed shut for the day.
The particular time zone dictates the opening hours of the stock market, so for example, the New York Stock Exchange and the NASDAQ are open from 9:30 am to 4:00 pm Eastern Time. However, you can still access the markets even after those hours are over thanks to after-hours trading.
But what is after-hours trading? In this article, we’ll be looking at that subject in-depth, and we will learn how you can conduct your own after-hours trading with your broker of choice.
We will look at the advantages that after-hours trading offers, and in the end, we will conclude whether or not this is a strategy that you can employ successfully in your investments.
Table of Contents
What Is After-Hours Trading?
As the name suggests, an after-hours trade occurs after the relevant market has formally closed for the day.
You can buy and sell stocks after hours. This strategy is now available to everyone, including newcomers to stock trading – not just institutional investors and high rolling individuals, as was the case a few years ago.
As you are probably aware, things can happen after hours that will significantly impact a stock’s price, from headline-making earnings announcements to breaking news stories. In truth, many factors can affect how a stock performs.
After-hours trading allows you to take advantage of these price swings without having to wait until the market opens the next day. By that time, the opportunity to trade at a value price may have already disappeared due to a high volume of orders placed.
And so, after-hours trading can provide chances for eagle-eyed and eared traders to profit; however, note that volatility can be high due to the number of investors trying to open and close positions at the same time in such a small window of opportunity.
How Does After-Hours Trading Work?
The first thing to note about trading after hours is that not all brokers offer this service. So it pays to do your research and find a broker that does – make sure you take the time to read reviews and do your homework on the right platform for your needs.
That way, you can answer questions like is Rakuten trade safe before you part with a single cent or penny of your capital.
It should be noted that after-hours trading is a different animal from how the traditional exchanges operate during regular session hours. Instead of placing your buy or sell order through the exchange, your request is placed into the electronic communication network (ECN).
Your order will be matched based upon the limit price available, and you can only buy or sell shares after hours with these limit orders. If your order isn’t matched in the market, you will have to place another buy or sell request once the market opens the next day.
To buy or sell after hours, you will need to log into your trading software and select the asset you wish to purchase as usual. You will then have to place a limit order and hope there is a buyer or seller to ‘match’ with through the ECN.
If your order can be matched through the ECN, your trade will be executed instantly. This open position can be closed at your discretion either after hours or once the market has re-opened for its next session. Trading after hours has the same execution times, so there are no unnecessary delays that prevent you from closing a trade.
Advantages And Risks Of After-Hours Trading
After-hours trading provides numerous opportunities and advantages to traders, both directly and indirectly.
If you watch a stock market as it approaches its closing for the day, you’ll notice that there tends to be highly volatile price action as investors and brokers seek to buy or sell before the bell goes.
That can create an imbalance in the market and create opportunities that allow you to lock in a couple of ticks of profit simply because an asset’s value has moved in an exaggerated fashion.
Typically, the price of a stock will revert to somewhere near its mean after hours; however, to get there, it will need some action from investors willing to take a quick profit from the move.
Don’t forget that what happens after hours will impact how the market behaves in the first hour or so of trading in the next session, and so using after-hours data can also ensure you get off to the best possible start.
Perhaps the most significant advantage of after-hours trading is also its biggest risk – volatility, which exists even after the market is closed for the day. Remember that investors will react to breaking news even after hours, especially now that post-close trading is readily available. While that can make it challenging to have a limit order matched, at least there will be plenty of liquidity flowing into the market.
Of course, we have to recognize the risks of after-hours trading too. From the get-go, your broker may charge extra fees for trading after the bell has rung, and so you should check whether this is the case with your chosen platform.
In some cases where there are no major stimuli after the market has closed, liquidity and trading volume can be lower than in the traditional trading session. This will naturally impact your chances of having your limit order matched.
It should also be noted that your broker will only use one ECN during after-hours trading, rather than having multiple options available to them during the regular trading session. Again, this will impact the price and the liquidity available, resulting in wider spreads that may make it difficult for your order to be executed.
Ultimately, trading after hours can be a hugely profitable angle for investors to utilize – especially when there are earnings reports and other breaking news stories to act upon.
However, as we have learned, there are risks to after-hours trading, so you will need to find the right balance in your trading activities.