Stocks After Hours
After-hours market – is a time frame in which the stocks and other assets are still being traded on the market, and yet the market itself is officially closed. The exchange doesn’t forbid new deals for some hours after and before the working hours (since ~9 a.m. till ~4 p.m.). After that, the market is at its after-hours state.
After-hours usually last up to 4 hours, but it may be a bit longer or shorter. The brokers don’t set the longitude of these spans themselves, they try to correlate them with the after-hours of the real exchanges, most notably the biggest exchanges in the region. So, for the American brokers these are NYSE, for instance.
Since New York Stock Exchange is open for wide public since 9:30 a.m. and until 4:00 p.m., these are usually the after-hours for the American brokers (especially for those located on the East Coast).
Why trade in stocks after hours?
The big exchanges conclude their deals in the early evening, but the prices never stop to change, not until the night when trading activity largely stops. And since the prices can change dramatically even when the brokerage providers are closed, there must be a way to undertake appropriate actions, otherwise the losses may follow.
For such occasions, a limited-capacity after-hours market allows investors and traders to conduct emergency deals. However, this market should be used for emergencies only, let it be clear. In most cases, the risks of such deals are greater than the benefits.
The risks of after-hours
After-hours is a very risky time of the day for stock. There are many dangers, and many can experience them even without ever visiting the exchange after closing.
- Low traffic
Unless some important news arrives or a very beneficial trend goes on even beyond the usual hours, not many people venture into this part of the market. Even during emergencies traffic mostly rises right after the event, and then rapidly falls. In the late hours (around 8 p.m.) most traders will have already left.
It’s a bad thing, for several important reasons. Here they go
- Low liquidity
Small population during the later hours translates directly into poor liquidity. The less liquid shares are, the longer it takes for them to be sold or bought. Because the emergency quickly goes down, you may not participate in it in time. So, if you’ve come late, you may consider buying for more or selling for less, if it makes sense.
Most of the time, it won’t. Unless the price surged high up or dropped to the bottom, you won’t gain much by consciously trading at an expense
- Volatility
Volatile assets often bring investors surprises by changing rapidly and sporadically. The after-hours don’t obey the usual rules of the market. The emergencies in the face of sudden price changes can themselves alter the value, and the panic that may follow after will add up to volatility.
Moreover, the fact that less people are trading on the exchange in the later hours means that it’s much easier to influence the prices. It’s a relief that in the opening hours the prices usually go back to the usual norms of the previous day. So, does after hours trading effect opening price? It may, but it’s unlikely.
- Wide spreads
The spread is basically the difference between the highest selling price and the lowest buying price. For many reasons, in the after-hours the spreads get wider and wider – mostly because few people trade and those who do try to sell their stock dearly or buy cheaply. Whether it’s good or bad is up to speculation.
The principle behind after-hours
You don’t exactly trade on the exchange itself when the closing bell rings. Instead, you’re invited to an Electronic Communication Network (ECN) to perform your late purchases and sales.
ECNs are channels of direct trading between major brokers and the individuals like you who wish to be a part of sudden trading boom. Granted, it takes more time to make deals here, even ignoring the general low participation rate. However, if you are willing to trade in a more or less current market price and came at a right time, you may be able to conduct a profitable exchange.
Depending on a nature of the emergency, some number of people may be willing to trade in altered prices, but the more you wait, the less it’s likely to happen. The all-evening hysterias rarely happen, though if some insane trend goes on after the market closes, it may take a long time to pacify it.
Even if stock price comes up by $20 dollars or more per share, the craze is likely to go down after only 15 minutes of immense trading.
The benefits
Stock market after hours trading is beneficial in several ways. Obviously, it’s a chance to gain profit from sudden price fluctuation. However, it’s deeper than that.
- Predict the change
Since in after-hours the exchanges don’t work, the potential for price movement is limited. However, if you somehow know that some systematic global event is going to change the value of some asset after the closing time, you can just as easily invest into the stock in the closing hour, and then see if the price changes.
If the prices stay the same, you can sell the stock in the opening hour. Whatever else happens in after-hours shouldn’t affect the price of your stock.
- The value changes without the boom
The emergency may not happen, but the worth of the popular and liquid assets can still change. After-hours is not the emergency-only space, though it’s very useful for such occasions. Of course, the liquidity is very limited in such times. But you can expect the strongly liquid stock to change value.
If the value changes even a slight bit during after-hours, you can conduct a deal. Remember that during evening hours the volatility increases. So, even a small push can change the price. The only real challenge is to find a buyer.
In conclusion
The potential benefits are still outnumbered by the risks. In the end, it’s better to use the after-hours in case of some emergency, as most people do.
The most notable risks include: poor liquidity, less trading volume, increased volatility, spread widening, and smaller number of investors.
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