After-Hours Trading Explained
After-hours trading is the extended time period in which securities are able to be bought and sold from 4 p.m to 8 p.m. (EST) Monday through Friday. Regular trading hours are from 9:30 a.m. to 4 p.m Monday through Friday. Electronic communication networks (ECNs) and recent technology has made after-hours trading available for nearly all traders. After-hours trading has a significant increase in risk in comparison to regular trading hours due to the low level of trading activity.
Other People Are Reading
-
History
-
After-hours trading for both the National Association of Securities Dealers Automated Quotation System (NASDAQ) and the New York Stock Exchange (NYSE) has been around since the early 1970s. From the 1970s to 1999, after-hours trading was mainly for large investors worth hundreds of thousands of dollars or more. However, after 1999, after-hours trading became widely available for all traders due to the widespread use of ECNs.
Purpose
-
The majority of company press releases are reported throughout the trading day; however, quarterly earnings are notorious for being reported before or after trading hours. A quarterly earnings report includes net income, earnings from continued operations and earnings per share during the last three months. Quarterly earning reports greatly impact the price per share of the security. After-hours trading is intended to adjust to this change in the intrinsic worth of the company.
-
Risks
-
The Securities and Exchange Commission recommends investors trade cautiously after-hours. The lack of liquidity in after-hours trading makes it difficult for trades to transact. Liquidity is the ability to convert securities into cash. In addition the lack of liquidity causes a great difference in the bid and ask which may prevent investors from getting a reasonable price for the security. The bid is the highest price at which a security is being offered to be bought. Similarly, the ask is the lowest price at which a security is being offered to be sold.
Function
-
After-hours trading provides signals for the price movement of a security of the next trading day. For example, if the after-hours trading of a particular security has a high degree of liquidity and a significant price change, this may indicate the security is going to react in a similar fashion when the stock market opens. The after-hours trading of the overall market also foreshadows the pessimism or optimism of investors for the net trading day. The SEC is able to use these signals to identify securities which may need to be halted due to a misleading company report.
Benefits
-
After-hours trading allows investors who are not able to buy and sell securities during regular trading hours a chance to trade. In addition, normal trading hours are inconvenient for West Coast investors as well as international investors due to time-zone differences, but after-hours trading hours provides them a time to buy and sell securities. Furthermore, after-hours trading allows investors to immediately see how news affects the price per share of their stock.
-
References
- Photo Credit stock chart with a pencil mark image by Dmitriy Lesnyak from Fotolia.com
