After-hours trading gives you the flexibility of reacting to market news and taking advantage of price swings. Does this mean that after-hours selling is a steering wheel?
After-hours selling is considered a steering wheel in the short term because it affects the stock prices between closing and opening bells. However, price movement during this time is volatile because of few traders and fewer orders and may not always represent market reality.
The rest of this article covers how after-hours selling works, its highs and lows, and tips for getting started in after-hours trading.
How After-Hours Selling Works
The New York Stock Exchange (NYSE) regular stock trading hours are between 9:30 a.m and 4:00 p.m Eastern Time (ET). But, post and pre-market trading, often known as after-hours trading, happens after the closing bell.
Post-market trading occurs between 4:00 p.m and 8:00 p.m, while pre-market trading is for early birds from 6:00 a.m to 9:30 a.m.
Trading after-hours happens through the electronic communication network (ECN), a bit different from day trading, which occurs through the exchange. Because of a low volume of orders and few sellers, ECN uses limited orders to regulate the market.
Once you place a buy or sell order, the ENC uses the limit price to match you with a corresponding demand. If there’s no match, ENC writes off the order, and you’ll have to wait for regular hours if you still have interest in the stock.
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How After-Hours Trading Influences Stock Prices
Like in regular hours, the law of demand and supply also influences stock prices during after-hours selling.
If demand is higher than supply, prices hike. On the other hand, if the supply is high and demand is low, prices decrease. This makes stock prices unstable.
However, after-hours stock prices are even more volatile because of few volumes of orders. They jump up and down rapidly, meaning after-hours investors can make high profits or losses.
If a company announces an increase in earnings after regular hours, investors trading at this time will make massive purchases. As a result, the stock prices will increase, and the closing rate will differ from the opening rate for regular-hours traders.
The Caveat to After-Hours Stock Prices
Price changes during after-hours selling show how the market reacts to new information. However, its effects are not lasting and don’t reflect the actual value that stock will trade during regular hours.
When the opening bell rings, professional traders are always eager to take advantage of low or high prices. And because many investors are trading during this time, prices tend to move smoothly after a few hours. This scenario writes off the effects of after-hours trading and establishes new market values.
This scenario is not ideal for investors seeking to increase their earnings in the long term.
The Highs and Lows of After-Hours Trading
After-hours trading has its upsides as well as its downsides. Let’s take a look at them.
After-Hours Trading Provides a Window for Receiving First-Hand Information
Regular trading operates for six-and-a-half hours like the banking system. However, most companies release news about their earnings after 4:00 p.m, locking out regular-hours investors. This is an advantage to after-hours traders who can use the information to make informed decisions.
Stocks Trade at a Premium
Because of less volume of orders, the spread between after-hours and regular hours is wide, and stock sells at a premium. Also, you get the flexibility and advantage of reacting to news before prices change, increasing your profitability.
Trading After Hours Gives Room for Proper Planning
Price movement during the day is more stable and helps traders make reliable predictions. Based on these predictions, you can plan your investment amount and where to invest. Proper planning reduces the risk and losses associated with the volatility of after-hours markets.
After-Hours Trading Can Create Misleading Stock Prices
In after-hours trading, you only see prices from one venue that don’t reflect regular-hour prices. If the cost of a stock increases during after-hours, it can decline to the regular-hour price when opening bells ring.
Stocks Trade at a Limit Price
After-hours securities trade at a limit price, meaning an order can only trade at a specific price or better. If the stock isn’t liquid, a filling won’t happen, and this could result in missed trading opportunities.
After-Hours Trading Can Be More Competitive
Investors who trade in the after-hours such as mutual funds have vast experience, and there’ll be stiff competition. Because such investors may have access to more information than individual traders, this also creates information asymmetry. Such instances may cause you to make losses, which works to the advantage of competitors.
Lack of Liquidity Is More Common After Hours
The market becomes less liquid when the spread between after-hours and regular hours widens. As a result, it takes longer to convert securities into cash. In addition, having few traders and trade volumes also makes securities illiquid.
Tips To Get Started in After-Hours Trading
If you’re just starting out in after-hours trading, here are a few tips to help you along the way.
Find a Brokerage That Trades After-Hours
Not all brokerages work past regular hours, so you’ll need to do your market research and find a company that has an app that’ll help you trade after-hours. Some brokers require an initial investment while others don’t. Getting all this important information is necessary before settling on a brokerage firm.
Examples of brokers to consider include:
- Robinhood: It’s a beginner-friendly app that requires zero ($0) initial investment and allows you to invest in stock, crypto, and options.
- Fidelity: It’s ideal for investors looking for managed investment options at any level. It gives you the opportunity to invest in mutual funds, stock, ETFs, and options.
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Do Research on Your Preferred Stock
Stocks traded after regular hours become volatile and require a good understanding of how the market operates. If you’re new to after-hours trading, you might need to do paper trading before actual investment to learn the market dynamics.
Stay Up to Date with the News
Most news affecting the market happens after regular hours, which gives you access to highly traded stock unavailable for day traders. Keeping up with the news keeps you a step ahead in maximizing your portfolio and profitability.
After-hours selling benefits short-term investors who rely on market movement to make earnings. However, it’s risky because of the volatility of prices and lack of liquidity. If you invest in the long-term, price movements in after-hours trading have less effect on your earnings.
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