What Is After-Hours Trading—and Should You Try It?

Masterworks
September 13, 2021

The markets never sleep… or so the saying goes.

But is it true? Sort of.

Both the New York Stock Exchange (NYSE) and the Nasdaq exchange are normally open for trading Monday through Friday, 9:30 a.m. to 4 p.m. ET. And those hours are fairly typical for exchanges all over the world, in their local time zones.

However, if you’re unable to meet the 4 p.m. trading cutoff, it doesn’t mean you’re excluded from making trades. Not at all. In fact, after the market closes, there remains a period of time (generally between 4-8 p.m.) where investors can continue to buy and sell securities. This is called after-hours trading.

(There’s also something called pre-market trading, which takes place between 4-9:30 a.m. ET for the Nasdaq and 7-9:30 a.m. ET for the NYSE. Together, after-hours and pre-market trading are often referred to as extended-hours trading.)

But during these times, the experience of trading isn’t quite the same as it is during the normal trading day. For one thing, any trades that are entered during extended-hours aren’t processed on the traditional exchanges. Instead, they’re done through electronic communications networks that match buy and sell orders after normal market hours.






How Do You Participate in After-Hours Trading?

Several of the most popular brokerage firms have introduced after-hours trading services, opening the option up to the average individual investor.

But, as with any investing strategy, there are advantages and risks to after-hours trading. Here’s what you need to know about getting involved in the extended-hours periods as an investor…

The Risks of After-Hours Trading

Less liquidity: Because fewer people are trading after hours, the volumes of the stocks being traded are lower. This could make it more difficult to sell your shares and pull cash from the market. Also, when there’s lower volume, it could lead to a wider spread price—in other words, it could be difficult to sell your shares for the price you want.

Volatility: Fewer people trading means more volatility, that’s just a fact of life in the markets. Because after-hours markets are thinly traded, with most activity happening during the regular trading day, after-hours trading is known to involve some wild price swings. This can send asset prices skyrocketing during the night, only to come crashing back down to Earth by the time the markets open for regular trading again the next morning, so extended-hours trading is not for the faint of heart. (On the flip side of this coin, the extra volatility that comes with off-hours trading means you could also find some equities trading at bargain prices that you wouldn’t find during the regular daytime session.)






Playing with the big boys: Because of the risks involved in after-hours trading, it’s typically something that’s only done by highly experienced institutional investors that have far more resources at their disposal than the average investor. And it’s not just about the money they can afford to invest (or lose) that makes the difference. They also have access to expensive, proprietary software systems that can quickly calculate values and execute trades before the individual investor’s screen has even fully loaded, allowing them to take full advantage of after-hours volatility.

Lesson: If you wade into shark-infested water, don’t be surprised if you get bitten.

Limited order options: During after-hours trading periods, you can typically only use limit orders to buy and sell equities. You can’t place stops, stop limits, or orders with any special conditions, which limits the options that investors have when executing trades.

The Advantages of After-Hours Trading

Trade on news immediately: Sometimes newsworthy events—events that have the ability to affect a stock’s price or move markets—occur after the market closes. This isn’t at all uncommon. In fact, many companies wait until after the market closes to release their earnings reports and other stock-moving news. Trading after hours means you can buy or sell stocks on the kind of headline news immediately, without needing to wait until the market opens and missing a potentially impactful swing in price.

It’s important to note that there’s a risk factor here as well: first reactions are not always correct. If you jump to conclusions too soon, you risk making an impulse decision that could prove quite costly later on.

Convenience: A lot of people don’t have the ability to trade during normal market hours—especially those who need to be in the office from 9 to 5 and don’t have access to trading during that time. After-hours trading offers a simple solution to that, albeit with the risks mentioned above.

Whether after-hours investing is for you depends on your investment goals and your level of risk aversion. Whatever you decide, it’s important to be aware of the risks and benefits so you can make an educated decision about trying after-hours trading.







Masterworks
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