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Should I buy/ sell stocks during after-hours?

Updated: Apr 9

After-hours trading may sound like uncharted territory, but it’s a valuable tool for those looking to extend their trading options beyond regular market hours.


In this blog, I will demystify after-hours trading, exploring its mechanics, advantages, and potential pitfalls. Let’s dive in.


Understanding after-hours trading


After-hours trading takes place after the stock market officially closes for the day, providing an extended window for buying and selling stocks.


In the United States, this period typically spans from 4 p.m. to 8 p.m. ET, excluding Saturdays and Sundays.


The time for pre-market hours, market hours and after hours for the U.S market.

How does it work?


In after-hours trading, orders are routed to electronic communication networks (ECNs) rather than exchanges. These systems pair buy and sell orders, facilitating trades.


For instance, if an order is placed to buy 100 shares at $10, the computer checks if there is a corresponding sell order for at least 100 shares at $10. If such an order exists, the trade is completed; otherwise, the order remains unfilled.


Things to consider


Not all brokers offer after-hours trading, and those that do may have varying rules. Before diving in, consider these key points:


  1. Potential Fees: Check with your broker to see if there are any additional fees associated with after-hours trading.

  2. Trading Hours: Different brokers may offer different after-hours trading windows, so be sure to know what your broker provides.

  3. Order Types: Understand the types of orders available during after-hours trading to make informed decisions.


Benefits of after-hours trading


There are a few advantages that I can think of.


After-hours trading offers convenience for traders with busy schedules, allowing them to check quotes and place trades at more convenient times.


It also provides the opportunity to react to news events, such as earnings reports, and take advantage of positive or negative results.


For dividend stock investors who miss the chance to buy before the ex-dividend date, after-hours trading can be advantageous in securing eligibility for dividends.


However, there are risks involved as well.


4 key risks of after-hours trading


  1. Limited ECN Access: Unlike regular trading, after-hours trading limits your access to ECNs, potentially affecting pricing.

  2. Lower Liquidity: After-hours trading typically sees fewer participants, leading to wider bid-ask spreads and increased risk of unexecuted orders.

  3. Volatility: After-hours trading can experience increased volatility when a multitude of investors react swiftly to news, leading to abrupt price fluctuations as the market adapts. This can pose a challenge for regular investors in gauging the probability of their limit orders being fulfilled. In such cases, waiting for regular trading hours might present more favorable pricing prospects.

  4. No Public Index Values: There are no index values provided for public use after-hours. This can present a difficulty for individual investors looking to engage in trading certain index-tracking products in the after-hours market.


Does after-hours trading impact the next trading day?


The impact of after-hours trading on the following day’s stock price is complex and can vary by case.


While trades in pre-market and after-hours trading can influence the opening price of a stock, it is not solely determined by these trades; instead, the first purchase made during regular trading hours plays a significant role, though the actions before the market opens can still have an impact.


So, do I buy or sell stocks during after-hours? Or, do I even bother about the impact of after-hours trading?


The answer is no.


I am not comfortable with the additional risk I am exposed to. The risk-to-reward ratio is bad.


Also, as a long-term value investor, the price movements that happen in stocks during after-hours do not matter in the long run.


The most important thing is to do your fundamental analysis and invest at your margin of safety price level.


Conclusion


After-hours trading can be a powerful tool for certain traders, offering extended opportunities and flexibility.


However, it’s not without its risks. Understanding the mechanics and weighing the pros and cons is essential before deciding if after-hours trading aligns with your investment goals.


Remember, every investor’s journey is unique, and what matters most is finding an approach that fits your individual strategy and risk tolerance.

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