After Hours Stock Trading

After hours stock trading was launched in 1999. It makes Wall Street a 24-hour marketplace. Most investors I spoke to have no idea what it is so I’ll elaborate. Usually the New York Stock Exchange (NYSE) and NASDAQ are open from 9.30am to 4.00pm Eastern Time.

Trading would then shut down for most investors. Some high net worth investors and institutional investors were allowed to trade ‘After-hours’.

It presents investment opportunities because by definition you’re able to trade in a stock when the markets have closed. This means that if you think a certain stock is going to fall when the market opens you can sell it, or you can buy a stock you think is going to rise. The After-hours market provides an indicator of what may happen in the next trading day. The After-hours market was open to individual traders in 1999 but hasn’t taken off despite the obvious convenience.

There are a number of reasons for this.

1 – The inability to see quotes from other sources. Some brokerage firms will only use one trading system for After-hours investing. During the day they may have access to many systems that quote differing prices on a stock, allowing you to buy the cheapest.

2 – The number of users of the After-hours market is sometimes not adequate enough to execute trades. Some stocks may not even be available at all. This means stock is not as liquid as they are during the day, when you can sell them in a crowded marketplace.

3 – The lack of activity (supply and demand) may mean you pay more for a stock simply because it is not as readily available After-hours. The price of the stock After-hours could fluctuate compared to its price on closing.

4 – One of the biggest constraints on investors is the practice of brokerage firms to place limit orders. To buy a stock with these firms you would have to enter a price at which you would like your order to be executed. It means you will not pay more than the price you entered and you cannot sell for less either. This may sound great but sometimes the order isn’t fulfilled After-hours due to lack of activity.

5 – As most After-hours investors are major players in the market they will have access to more information that you.

6 – After-hours trading isn’t necessarily a true barometer of how a stock will act the next day due to the light trading activity.

The best time to trade is probably within the first hour after the markets close as there will be more activity. For the individual investor it may be a good idea to restrict trades to normal hours. If you are going to trade After-hours then speak to your broker, find out what services they offer, and which they don’t.