What are After Hours Trading?
After-hours trading refers to the trading done on the stock markets after the market closes at 4 pm in the US thereby giving people an option to trade in the securities once the market closes and there is no further price movement.
People are allowed to trade in shares even if the market has closed in the after-hours session, thus reacting to the latest news and events with respect to the stock and take the advantage before the market reopens on the next day.
How does it Work?
- The US stock markets start at 9.00 am and closes at 4 pm. This session starts from 4 pm till 8 pm, during which the investors can trade in securities without any impact on prices.
- It is more popular among the high net worth individuals and institutions like the mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more who have the risk-taking ability.
- More common among the risk investors who want to take a high risk on their investments to have higher returns
- There are certain rules and regulations that apply to the after-hours trading as compared to the normal trading hours with regards to the type of the orders accepted, the presence or the absence of the market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.read more.
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Source: After Hours Trading (wallstreetmojo.com)
How does After-hours Trading have an Impact on the market?
The trading is done in the after-hours session will definitely impact the opening price of the stock since the traders will take into account both the latest news and events with regards to the stock as well as the trading done in the stock. For example, If there is news out on the internet that there is a trade war between the middle east and the US, traders may take sell positions in the stock in the after-hours session expecting the market to go down the next day in the morning and earn profits.
Risk Involved in After-hours Trade
Even if trading is possible after the normal market has closed, some risks need to be taken into consideration while trading in the stocks. Below mentioned are some of the risk factors that will play a major role:
#1 – Less liquidity
The liquidity in such sessions is far less as compared to the normal working hours where there are a large number of buyers and sellers to trade in the securities. Hence there is a risk of liquid cash getting generated in the after-hours trade. The trading volume in the stocks would be very minimal, with mostly large financial institutions taking the bigger pie in it. Hence, the retail individuals are left with minimal quantities to trade-in.
#2 – Spreads
Due to the low volume in such sessions, the bid and ask prices vary at a significant level due to which the investors may not be able to trade at the prices favorable to them. The buyer and sellers may post a vague bid and ask price, thus taking advantage of the trading session and benefiting from the same.
#3 – Mostly Favorable for Institutional Investors
Since large institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more trade in large volumes and value, it would be very difficult for the individual investor to compete with the large institutional investors since they have access to more resources and facilities.
#4 – Volatility in Stock Prices
Due to the low trading volume, there is immense volatility in the prices of the securities, which may result in high-end fluctuations. Due to high fluctuation, trade may be a little riskier as the buyer might end up purchasing the stock at a higher price, and also the seller may end up selling the stock at a throw-away price.
Advantages
Below mentioned are some of the advantages:
- Convenience: It provides a convenience to the investors who missed an opportunity to trade in the normal market hours and want to execute a trade after market hours. It gives the investor time to trade in his securities even after normal market hours, thus providing him with comfort and convenience.
- News and Events: One can take advantage of the latest news and the events affecting the stock prices and take suitable positions in the aftermarket hours session to take advantage of the news.
- Technical Analysis: Once you can also analyze the chart of the stock and react to the same before the market opens tomorrow morning at 9.00 am.
Disadvantages
- You have only access to buy, sell, or limit orders. Hence your order will either get partially filled or not be executed at all.
- One may not get the best possible price for the stock since, due to the low volume, there would be high price fluctuations, and the right price may not be available, which is best suited for the investor.
Conclusion
Hence from the above information, we learned today the basics of the after-hours trading, how it is worked and what are the pros and cons of the same. Although it’s an interesting concept, however, it comes with various rules and regulations that need to be followed before trading.
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