The opening bell has been a symbol of the start of the trading day for generations. Right at 9:30 am EST, the bell rings out across the trading floor to signal the frantic beginning of yet another market opening. But like most symbols, the ringing of the bell is a tradition that’s largely ceremonial in nature.
The bell-ringing doesn’t signify the opening of the market, just the opening of the major exchanges. In reality, the trading day is a full 16 hours, although not everyone has access to stocks outside the normal working hours of 9:30 am to 4:00 pm. After-hours trading may seem like an advantage, but there are risks to consider that don’t surface during the typical trading session.
What is After-Hours Trading?
Trading done outside the 9:30 am to 4:00 pm window is known as pre or post-market trading. The New York Stock Exchange will stop taking orders at 4:00 pm, but trades can still be routed through electronic communications networks (ECNs). For most traders, the day can begin as early as 4:00 am if access to ECNs can be attained.
After-hours trading has an outsized effect on stock prices for a few reasons. First, earnings reports are released during the after-hours session and earnings beats or misses are frequent catalysts for stock price movement. Secondly, liquidity is low during these sessions and the number of traders buying and selling dwindles. When liquidity is low, stock prices can often move drastically on relatively low volume.
When trading after hours, buyers and sellers can execute traders as late as 7:59 pm EST. Trading from 4:00 am to 8:00 pm provides a 16-hour session for those looking to profit off the volatility that occurs when major exchanges close. Of course, trading after hours requires a different mindset and those new to the game may not understand the risk and reward of buying or selling at this time. Here are a few pros and cons to consider when debating the merits of after-hour trading.
Pros of After-Hours Trading
Longer Time Frame to Trade
This may seem obvious, but day traders and other types of high-frequency traders can exploit more opportunities in after-hours sessions because they have a long time frame to identify potential winners. Access to these periods also allows traders to get a jump on those awaiting the opening bell (or maybe even those still sleeping – 4 am EST is early!).
Trade News and Earnings Reports
Stocks do not report earnings during the open market session – only before or after the bell. However, if you have access to after-hours trading, you can react instantly to earnings news and conference calls. For example, if a company reports a surprise earnings miss, you could quickly exit the position before most market participants can hit the sell button. On the other hand, a biotech stock with a positive drug trial announcement can be instantly added to your portfolio before the waves of other traders pile in.
Increased Volatility
Some may consider this a con, but they aren’t the ones looking to trade after hours. For traders operating during these hours, volatility is a plus because they can make large profits quickly. Volatility tends to increase after hours because earnings and news are usually dropped after the bell rings. Stocks can make large moves on very little volume during these periods.
Cons of After-Hours Trading
Liquidity Concerns
Volatility is a double-edged sword and one of the main reasons after-hours trading is so chaotic is the limited number of market participants. Far fewer shares are exchanged after the bell and this lack of liquidity can create significant risk to those looking to place large orders. Not only do orders frequently get partially filled (if filled at all), but exiting a losing position can be very tricky during after-hours sessions since liquidity can dry up rapidly. Always be cautious when trading large positions on low volumes.
Only Limit Orders
Since orders cannot be routed through exchanges after 4:00 pm, brokers must send them through ECNs. ECNs all have different rules and regulations for routing orders, but one universal rule is that market orders cannot be used to execute trades. Only limit orders can be used during pre and post-market trading and an unfilled order is not a rare occurrence after hours. Additionally, extra fees may apply to orders executed outside the normal session times.
Different Rules for Different Brokers
Not every broker or institutions offers the same after-hours trading sessions. Some don’t even offer after-hours trading at all! If you want to begin trading in pre or post-market, you might need to evaluate your broker’s policies. Some allow trading at 4:00 am while others start at 8:00 am. Be sure to research different brokers and find one with an ideal time frame for your trading goals.
Work With an Experienced Financial Advisor
Our knowledgeable financial advisors at Good Life Financial Advisors of Mt. Pleasant are here to help you plan your investments. Contact us today to speak to our consultants and learn more about the tools and guidance we offer.
Disclosures
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.