CandleFocus Glossary Editor
After-hours trading refers to stock trading activities that occur outside of normal trading hours, namely during the premarket and aftermarket trading periods. The premarket trading session starts at 7 a.m. and runs until 9:25 a.m., while the aftermarket trading session starts when the normal market trading closes at 4 p.m. and runs until 8 p.m. Both the premarket and aftermarket trading sessions provide investors with the opportunity to buy and sell stocks in the absence of regular market hours.
The primary benefit of after-hours trading is convenience for those investors who cannot trade during the normal market hours. For instance, those who do not have easy access to classified stock market information or who simply feel more comfortable executing trades outside of normal market hours might find after-hours trading useful. The other main benefit of after-hours trading is the potential for special investment opportunities due to news and information released after regular market hours. Academic research has found that since investors are able to react to news released outside of normal trading hours in a relatively efficient manner, after-hours trading generally does not provide investors with significant performance advantages.
Though there are several advantages to trading outside of normal market hours, investors should also consider the risks associated with after-hours trading. Low liquidity, wide price spreads, and higher volatility are among the most common risks. Low liquidity means that it could be difficult to find a buyer or seller when executing a trade, and as a result, investor trades may take much longer to execute. Compared to normal trading hours, the bid-ask spreads (the difference between the buying price and the selling price) tend to be much wider during after-hours trading. High volatility can also be an issue – any sudden shift in market sentiment could cause the price of a stock to drop quickly, reducing the amount of capital the investor stands to make from a trade.
Additionally, the regulations regarding after-hours trading vary from broker to broker, generally focusing on order types such as limit orders and market orders. Some brokers also restrict the type of stocks that can be traded in the after-hours market. Online trading platforms also generally impose additional restrictions on after-hours trading, including minimum order sizes and a restricted list of available stocks.
Overall, after-hours trading is an excellent opportunity for investors to take advantage of the flexibility and convenience afforded by trading outside of the regular market hours. Though there are some risks associated with trading during the aftermarket period, the potential benefits can outweigh the risks if investors are diligent and take proactive steps to manage their trades.
The primary benefit of after-hours trading is convenience for those investors who cannot trade during the normal market hours. For instance, those who do not have easy access to classified stock market information or who simply feel more comfortable executing trades outside of normal market hours might find after-hours trading useful. The other main benefit of after-hours trading is the potential for special investment opportunities due to news and information released after regular market hours. Academic research has found that since investors are able to react to news released outside of normal trading hours in a relatively efficient manner, after-hours trading generally does not provide investors with significant performance advantages.
Though there are several advantages to trading outside of normal market hours, investors should also consider the risks associated with after-hours trading. Low liquidity, wide price spreads, and higher volatility are among the most common risks. Low liquidity means that it could be difficult to find a buyer or seller when executing a trade, and as a result, investor trades may take much longer to execute. Compared to normal trading hours, the bid-ask spreads (the difference between the buying price and the selling price) tend to be much wider during after-hours trading. High volatility can also be an issue – any sudden shift in market sentiment could cause the price of a stock to drop quickly, reducing the amount of capital the investor stands to make from a trade.
Additionally, the regulations regarding after-hours trading vary from broker to broker, generally focusing on order types such as limit orders and market orders. Some brokers also restrict the type of stocks that can be traded in the after-hours market. Online trading platforms also generally impose additional restrictions on after-hours trading, including minimum order sizes and a restricted list of available stocks.
Overall, after-hours trading is an excellent opportunity for investors to take advantage of the flexibility and convenience afforded by trading outside of the regular market hours. Though there are some risks associated with trading during the aftermarket period, the potential benefits can outweigh the risks if investors are diligent and take proactive steps to manage their trades.