After-hours trading is just as it sounds: trading stocks outside of normal trading hours. After-hours trading allows investors to react to new information that’s released outside of normal trading hours. It can also give certain time-strapped investors more time to execute trades, especially if their day jobs don’t permit trading.
Trading stocks after-hours might seem harmless. After all, what difference does it make whether you trade during normal hours or outside of them? But after-hours trading does come with some special risks, especially for investors who make a habit of doing it. Below we’ll discuss everything you should know about after-hours trading, both the risks and the rewards, to see if it’s right for you.
What is after-hours trading?
After-hours trading is an investment strategy involving buying or selling of securities—stocks, bonds, or other assets—outside of normal trading hours. In Canada, stock exchanges typically have a post-market (trading that occurs after the market closes), though we usually don’t have a pre-market (trading that occurs before the market opens).
For example, the Toronto Stock Exchange (TSX) is open Monday through Friday at 9:30 a.m. ET and closes at 4:00 p.m. ET. If you want to trade a stock in the after-hours, however, you can do so from 4:15 p.m. ET to 5:00 p.m. ET. After 5:00 p.m., you’ll have to wait until 9:30 a.m. on the next weekday to execute your trades.
How does after-hours trading work?
After-hours trading works a bit differently than trading during normal hours.
For one, after-hours trading doesn’t operate on the stock exchange but rather on an electronic communication network (ECN), which takes the place of a stock exchange. Like a market maker, an ECN uses its database to match your order with a buyer or seller. For instance, if you wanted to sell 100 shares of ABC stock at $60 per share, the ECN would look for a buyer who wants to buy 100 shares of ABC stock for $60. If the ECN successfully locates the buyer, then the order is executed.
In addition, not all order types are available in after-hour trading. In fact, you’re usually restricted to just one: limit orders. Other orders, such as market orders, stop orders, and buy-stop, are only available during normal trading hours.
Do all brokers offer after-hours trading?
No. Not all brokers offer after-hours trading, though, in Canada, many of the best online brokerages do.
For those brokers that do allow after-hours trading, each will have different rules governing how you can conduct those trades. For instance, some brokers may give you less time to execute after-hours trades (for example, some might start at 4:30 p.m. instead of 4:15 p.m.), while others will let you place orders with no restrictions. Some brokers allow you to place after-hour orders online, while others require you to call a representative.
Likewise, some brokers will charge additional fees for after-hours trades, which could be higher than for normal hour trading.
What are the benefits of after-hours trading?
Perhaps the greatest benefit to after-hours trading is the ability to react to news events that happen after the market closes. These include earnings reports, major company announcements (such as a CEO stepping down), economic reports (inflation or job reports, for instance), and other forms of breaking news.
In fact, many companies are strategic about the time at which they announce negative news. Since they don’t want to cause an over-reaction during normal trading sessions, they typically wait until markets have closed to make announcements that could damage their stock’s value. During this time, investors have an opportunity to sell their shares during after-hours, or at least before the stock takes a dive.
After-hours trading can also be convenient. Some investors simply don’t have the time or schedule to trade during normal trading hours. The opportunity to trade after the market closes can help these investors buy and sell stocks after the workday has ended.
What are the risks of after-hours trading?
While trading during after-hours helps investors react to news, it does come with numerous risks.
Perhaps the biggest risk is lower liquidity. Compared to the millions and millions of transactions that go on during normal trading sessions, after-hours trading has significantly less volume. With fewer buyers and sellers, you might find it difficult, if not downright impossible, to buy or sell your shares of stock.
But lower liquidity comes with an additional risk: wider bid-ask spreads. In other words, there might be a wider gap between the highest price a buyer is willing to pay (the “bid”) and the lowest price offered by a seller (the “ask”). These wider bid-ask spreads could lead you to settle for a price that doesn’t reflect the stock’s fair value.
Speaking of prices, another risk is in the very price of stocks themselves. Unlike stock exchanges, which consolidate data and give you the best available price from multiple venues, your broker gives you the best available price from only one venue: whichever ECN that broker uses. That means the price you see for a stock might not reflect the price for the same stock in other ECNs, let alone the stock exchange itself.
Finally, by trading after-hours, you might encounter more market volatility. This is especially the case if negative news has disseminated after-hours, causing a sell-off of a certain stock. As more and more investors try to react to the news, the stock’s price could fluctuate immensely. The sheer volume of sellers could make it difficult for you to sell your shares, especially since after-hours traders are usually professional or institutional investors.
Foolish bottom line on after-hours trading
For certain investors, after-hours trading allows you to react to new information, as well as trade stocks when it’s more convenient for you.
But let’s be clear: after-hours trading comes with unique challenges, such as lower liquidity, higher volatility, fewer traders, and less price transparency. If you decide to trade stocks frequently after-hours, you do so at your own risk.
Of course, to trade after-hours, you’ll first need a broker that allows such trades to occur. Take a look at Canada’s top online brokerages to see which ones allow after-hours trading.