After-hours trading allows investors to act on sudden events or situations before and after regular market hours
Just because stocks are off the clock, doesn’t mean they’re not still being traded. This practice of trading after-hours is called after-hours trading and it’s become more common in recent years.
What is After-Hours Trading?
After-hours trading, sometimes called extended trading, is trading undertaken on electronic market exchanges either before or after regular trading hours.
In the United States, pre-market trading occurs between 8:00 a.m. and 9:30 a.m. Eastern Time (ET), and after-hours trading typically occurs between 4:00 p.m. and 6:30 p.m. ET. After-hours trading is usually abbreviated on message boards with the acronym AH.
Until recently, after-hours trading volume was relatively low. However, the volume of extended trading has exploded, as online trading and related computer technologies have become more prevalent and the markets have grown more international.
Once the preserve of big institutional investors who had the confidence to deploy unorthodox methods, trading after-hours is increasingly being adopted by retail investors, who are becoming more comfortable with the interconnected electronic communications networks that make it possible to trade at unconventional hours.
Online trading is less of a novelty and more commonplace, removing the mystique of extended trading.
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Benefits of After-Hours Trading
After-hours trading allows nimble investors to act quickly to major events that are investment “catalysts,” such as sudden corporate misfortune, political turmoil overseas, terrorist attacks, etc. This allows investors to either take advantage of an event to invest or to cash in their shares if a development is threatening to their investment.
Trading before or after the markets officially open allows instantaneous investment decisions that are pegged to the latest developments.
A caveat is that extended trading can be subject to the emotional whims and fears of less-seasoned, smaller investors—consequently, veteran pros on Wall Street sometimes derisively refer to after-hours trading as “amateur hour,” a play on the AH acronym.
Downsides of After-Hours Trading
Although, trading after-hours is still accompanied by risk. First, since more stocks are traded during regular market hours, there is less liquidity during after-hours trading. This may make it more difficult for investors who are looking to cash in shares.
Second, volatility can be a positive and negative factor in extended trading. Due to the relatively small amount of stocks traded after-hours, this subjects stocks to various price changes that could either help or hurt investors. While it can be beneficial, volatility should be a concern when trading after-hours.
Finally, institutional investors can dominate after-hours markets. Since they possess more resources and are well established, they are likely to have an advantage over individual investors who may not possess the capacity or infrastructure to compete with larger companies.
Overview of After-Hours Trading
Despite the risks, trading after hours can be a beneficial way for investors to act on sudden events to either invest in potential winners and sell potential losers. Also, as individuals become more comfortable with electronic communications networks, after-hours trading will be less dominated by institutional investors and will allow individual investors to compete with them on a more level playing field.
Have you engaged in extended trading? What have been your results?
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