After-hours trading is the name given to the buying and selling of stocks outside of the trading day of the stock exchange. Let’s look at some of the risks involved.
This week has seen a particularly high amount of volume in after-hours trading. The likes of Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) all announced their respective earnings reports this week after market close, causing a huge spike in activity. Let’s take you through what is after-hours trading and some of the risks that it carries.
- The NYSE and NASDAQ are open for regular trading from 9:30 a.m. to 4:00 p.m. EST.
- Some brokers allow you to trade after hours, but there are far fewer people to buy from and sell to.
- Less liquidity and higher spreads mean it can be hard to get the price you want.
We live in a world where nearly everything is available 24/7.
So why not trade stocks around the clock too?
The truth is, you absolutely can. Trouble is, there are risks and dangers you need to be aware of first.
The New York Stock Exchange and NASDAQ are both open from 9:30 a.m. to 4:00 p.m. EST. During these hours, it’s business as usual. Liquidity is high and spreads are low.
But when the lights go down in the city, things change. After hours, you’ll find:
- Less Liquidity – Sure, you may be in the mood to sell 100 shares of Beyond Meat (NASDAQ:BYND) at 2 a.m., but there may not be anyone in the mood to buy it at that hour. When there are fewer players in the game, you may have a harder time meeting your match in the markets.
- Wider spreads – Fewer players mean less trading volume. That leads to wider bid-ask spreads, and market prices may not come anywhere near what you’re looking to pay.
- Higher Volatility – If a company announces some hot news after-market, demand in the stock could increase to a point where it overwhelms the number of after-hours traders who want to sell that same stock. As a result, share prices will spike dramatically. Then, once the market opens and more sellers show up to the party, the stock price could just as quickly tumble back to a fair level.
That doesn’t sound very fun…
It’s not all bad, of course! Here’s a great way to utilize after-hours trading data:
Think of it as a leading indicator for the next trading-day activity in the stocks you own. Chances are if a stock makes big moves overnight, it will continue in the same direction the next day.
If you absolutely must have your fingers in the pie 24/7, then make sure to enter a limit order whenever you trade after hours. This will protect you from any wildly erratic price swings.
But, hey, the time between 4:00 p.m. and 9:30 a.m. EST is a good chunk of time to reflect, research and consider your strategy.
So in this case, we suggest going with the crowd and trading when the rest of the world is active, too.
If you want to learn more about investing, check out the following articles:
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in the companies mentioned above. Read our full disclosure policy here.