What is the After Hours stock market?
The after-hours stock market is a period in which you can buy and sell securities when the regular stock market is closed. Usually, this period begins at 4 p.m. ET and ends at 8 p.m. ET, although OTC markets are open 24/7 and NASDAQ OMX will do extended trading hours (ETH) from 4 a.m to 8 p.m., depending on the ETF or security being traded
The difference between the regular and after-hours market lies mainly in liquidity, meaning that the number of buyers and sellers who are willing to participate over a given time period is what drives prices to move up or down. During normal trading hours, there are far more participants who are ready to transact business; this allows for fairly quick executions with minimal slippage as orders are routed into execution venues with large pools of liquidity such as order-driven exchanges like NASDAQ OMX (NDAQ). The opposite holds true during ETH: due to fewer participants in the after-hours session, larger spreads will make it harder for investors to get their orders filled at desirable prices
Why is After Hours trading a potential goldmine
After-hours trading is a potential goldmine for investors. It allows you to have better liquidity and smaller spreads. This means that it’s easier to buy or sell stocks at a better price during this period. Bloomberg also notes that because of the fewer participants, there’s a greater opportunity to make informed trades before the news becomes public knowledge.
How does After Hours trading work?
What is After Hours Trading, exactly?
It’s trading that occurs outside of the regular business hours for stock markets. In other words, it happens before the market opens and after it closes. While exchanges have set times in which they buy and sell stocks, there are also electronic communication networks (ECNs) that facilitate trades during off-hours. These ECNs match buyers and sellers to execute after-hours trades.
How does it work?
For those who are new to After Hours trading: you can buy or sell securities on ECNs during extended hours trading sessions. These ECNs allow investors to trade with each other in real-time through computer systems. You can also place limit orders to buy or sell your stocks at a specific price before the market opens or closes.
One thing to note is that liquidity—the ability of an asset to be sold quickly without a loss in value—is generally lower than what one would typically experience during regular market hours because the volume is lower; thus, prices may be more volatile and spreads may be wider as well (i.e., the difference between the bid price and ask price).
After Hours trading considerations
After-hours trading comes with both advantages and disadvantages. Though the extended trading window is an advantage, it also creates an additional element of risk. In addition to the usual factors that can result in financial loss, after-hours trading exposes you to increased volatility because fewer traders are participating in trades. There is also the possibility of receiving inaccurate information because there aren’t as many analysts monitoring stock prices during after-hours trading. After-hours trading puts you at a higher risk for price manipulation and broker errors.
Even though selling stocks after regular market hours can make you more money, risks are still present during this period; so be sure to have a safe strategy before entering the market.
After-hours trading can be a good addition to your investment portfolio, but it could also have consequences, so plan before you start. Here are some tips for trading outside of regular market hours:
- Start small
- Plan ahead
- Don’t overdo it
- Invest in companies you know and understand
When After Hours trading makes the most sense
There are many pros to After Hours trading, but there are also risks. If you’re a trader and you’ve never traded on the secondary market, it’s important to have a solid understanding of what you’re getting into before jumping in head-first. If you do decide that this kind of trading is right for you, here are some criteria that may help determine whether or not it will be successful:
- You feel comfortable with the level of risk involved—and know how to minimize risk whenever possible.
- You are able to monitor your stocks closely.
- You have a specific strategy in place for how long to hold your stocks, at what point to sell them if the market is dipping, and other factors of that nature.