What Are the Risks of After-Hours Trading?
In the recent stock market turmoil, you may have noticed a lot of talk about after-hours trading. Before you venture into that investment arena, it’s important to educate yourself.
It’s not unusual for a stock to trade at prices 7% to 10% different from normal—just because it is exchanged during after-hours trading. The process of buying and selling doesn’t change just because the sun sets, so why is it so risky to trade after hours? A basic understanding of what after-hours trading is provides a good launch-point for the discussion of risk.
Trading the stock market is typically done between 9:30 a.m. and 4:00 p.m. These are the hours when the market is officially “open.” However, just because the physical trading operations close doesn’t mean you can’t trade stocks. Even after the doors shut, you can engage in trading activity, and this is known as after-hours trading. While the concept is simple, trading after hours does come with some risks. Here’s what you can expect.
You Can’t Buy and Sell as Easily
In order to buy or sell a stock, you need somebody on the other end of the transaction. Stocks, like all goods, are exchanged between real people or entities. During after-hours trading, the number of people trading is far less than when the doors of the exchanges are open during the day. This means fewer people are looking to buy your stock, and there are fewer folks out there trying to offload their stock to a buyer like you.
If you trade after hours, you run the risk of not being able to complete the transaction for a reasonable price. You will likely still be able to do it, but not for the price you would like.
Prices Are More Volatile
When prices hop up and down erratically, it’s easy to suffer quick losses. During after-hours trading, prices move much less predictably because the number of people buying and offering shares of stock is less.
For instance, imagine there are 12 buyers at $10 for XYZ, but there are 50 buyers at $11. If someone wants to buy 60 shares, the price will immediately hop up to $11 because all the shares offered at $10 were gobble up in the order. As soon as that order is placed, if you are watching the price of the stock, you’re going to see it leap up. If you were hoping to get it for $10 or less, you may be disappointed.
On the other hand, when there are more buyers in the market, there are more shares being offered at various price points. This makes the price movement less volatile.
News Events Can Drastically Affect the Value of Your Portfolio
You may grab a stock for a great price, but then minutes later a news event is released that affects the company. The price of your stock could immediately plummet. During the day, when there are more people trading, the movement may still be downward, but it’s likely to be less drastic because there are more people ready to buy when it hits certain levels. During after-hours trading, this same cushion of buyers may not be there.
Once you understand the risks of after-hours trading, you may still want to give it a shot. Regardless of how you approach it, you should do your research and make careful well-thought-out decisions.
Image via Flickr by Ken Teegardin