Beginning stock traders know the stock market has regular trading hours – they are open for business between 9:30 a.m. and 4:00 p.m. Billions of shares of stock are traded in the American markets alone, making the markets very liquid and efficient.
What beginners may not know is the stock market is also open for business after regular trading hours. Pre-market and post-market trading sessions allow investors to trade stocks between the hours of 4:00 a.m. and 9:30 a.m. during pre-market trading, and 4:00 p.m. to 8:00 p.m. for the post-market session.
Compared to the billions of shares traded during the day, after-hours sessions trade only a small fraction of that volume, which invites other problems traders have to consider before trading outside of the normal day. Can you make money trading before or after the bell? It’s possible, but first you have to do your research.
Why Not Just Trade During Normal Hours?
Companies are strategic about their announcements of important information. They don’t like to make announcements during the regular trading session because it could cause a large knee-jerk reaction that misrepresents the true value of their stock. If a company was to announce its last-quarter earnings and they were worse than expected, a large-scale move out of the stock could result in unwarranted big losses.
Although announcing this information before or after the close of the trading day may still cause a large reaction, by the time the market opens, investors and analysts will have read the entirety of the announcement, causing the stock price to better reflect fair value.
Should I Get Involved?
In the past, after-hours trading used to be one of the benefits of being an institutional investor. Retail investors did not have access, but that has changed since the markets transitioned to computerized trading. Retail investors now have access to these markets, but is it wise to trade in these after-hours sessions?
The Securities and Exchange Commission (SEC) wants you to know a few facts before trading after regular hours. First, these markets are less liquid. Also, because there are far less people trading, you may not be able to sell your stock. If an earnings announcement is worse than expected and you want to sell your shares quickly, you might not be able to, especially with smaller, non-blue-chip companies.
Second, the spread between the bid and ask price might be large, meaning the small amount of traders haven’t agreed on a fair price. Therefore, you may have to settle for a price that doesn’t reflect fair value.
Finally, because after-hours sessions are largely made up of professional traders and the volume is low, higher price volatility may be present, making it more difficult to know when to buy or sell. One large trade by a large firm could have a significant impact on the price of a stock.
How Do I Trade After Regular Hours?
Check with your broker. Most brokers now have access to after-hours trading for all of their investors. Some brokers allow limited access and others may only have access to certain computer networks, making order execution speeds slower. As the SEC advises, read all disclosure documents before proceeding.
After-hours trading may have benefits for traders trying to profit on expected news, or it may provide a means of entering or exiting the stock if unexpected news is announced. Nevertheless, trading after regular hours routinely is not recommended for most traders. The regular trading sessions offer better liquidity and more efficient markets, which makes all prices more reflective of fair value. It’s important to understand that different brokerages have different rules on trading hours.
Tim Parker can be contacted at BuildMyKingdom