After hours trading is a key weapon in the sophisticated stock market investor's armory. It makes up one part of the extended hours equation, along with premarket trading.But what is after hours trading, and why can it help you get better stock market results? Read on for some important pointers.
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What Is After Hours Trading?
After hours trading is simply the buying and selling of shares following the close of the regular stock market session. The stock market opens at 9.30 a.m. ET, and closes at 4 p.m. ET.
After Hours Trading Hours
The specific rules on after hours trading can differ from brokerage to brokerage. Many brokers let customers trade from 4 p.m. ET to 8 p.m. ET, however there are exceptions. One such example is Wells Fargo, which offers extended hours from 4:05 p.m. ET until 5 p.m. ET.
How Does After Hours Trading Work?
Most brokerages require customers to agree to the Electronic Communication Network user agreement before they can trade in extended hours sessions.
In addition, brokerage representatives often get in touch so investors understand the risks associated with extended-hours trading. Once this is complete, you can trade through your normal trading account.
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Why Can After Hours Trading Help You In The Stock Market?
After hours trading presents a unique risk and reward proposition. On the one hand, it allows you to trade on news events before many other investors. However, there are increased risks as the volume of shares traded is much lower. This means price swings can be more pronounced, and any gains or losses quickly wiped away when the full market opens the next day.
Orders executed during an after hours session are considered to have been executed during the day's traditional session for settlement and clearing purposes. This can be an important for dividend investors when buying a stock on the ex-dividend date. If you buy on or after the ex-dividend-date in regular trading, after hours trading or premarket trading, you do not qualify for the dividend. However if you buy the day before, even in after hours trading, you still qualify.
Track Stock Futures And Premarket Trading
After Hours Trading Risks
Trading on news after hours carries a special danger. Initial responses can sometimes be wrong, with investors and analysts coming to a different conclusion ahead of the regular session after digging deeper on earnings reports and questioning management on earnings calls.
Another point to bear in mind is it is likely you will be trading with experienced, more active investors. Like playing chess or poker at a higher level, these masters may teach a painful lesson to the green investor.
Why Do Stocks Fluctuate After Hours?
During regular stock market trading hours, there are far more people trading many more assets. The smaller number of investors trading outside of normal hours can make it more difficult to trade.
"There tends to be a lot less liquidity during the extended hours session," Gregg Murphy, senior vice president of brokerage products at Fidelity, told IBD. "There's a lot fewer people in trading so you're putting in orders you may or not get executed on. You may also get partial executions."
The lack of liquidity also has an effect on price, with the laws of supply and demand coming into play.
"You may see a stock that closed at a certain price and it might not be trading anywhere near where that security closed at for the standard session," Murphy said.
What Is Premarket Trading?
Premarket trading is for investors who wish to trade before the official open. It is the second part of the extended hours trading equation, and the session runs from 7 a.m. ET until just before the stock market opens.
The reason premarket trading can be lucrative is not just because earnings reports also come out before the open, as there is often other big market-moving news too.
For example, Murphy noted that the Labor Department's monthly jobs report comes out at 8:30 a.m., typically on the first Friday of the month.
Stock Market Futures: Why Do They Matter?
Stock futures are a type of futures contract. Stock index futures are used as an indicator of the future direction of the stock market, so they can give after hours investors important clues on how they should trade. The contracts are based on the future value of an index, such as the Dow Jones Industrial Average or the S&P 500. Single stock futures are also available, but they are not as widely referenced.
After Hours Trading Advice For Beginners
Many are tempted to jump in with both feet when it comes to after hours trading and premarket trading. However, Murphy believes it is essential that beginning investors build up experience before dipping their toes in the water.
"I think it's important that you understand the standard market session, how that operates. You'll see significantly greater liquidity with greater price transparency. You'll see much narrower spreads," he said. "There's just a lot less potential exposure in the standard market session than you're going to see in the after hours session. It's important people understand how to trade there before they move to extended hours."
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