After-hours trading (AHT) is the name for trades made outside the standard trading hours of the exchange. The majors (NYSE, NASDAQ) trade from 9:30 am until 4 pm Monday through Friday, which happens to be the same standard hours for OTC markets, which is where most penny stocks trade.
Unofficial trading hours are from 4:15 to 8 pm and 4:15 am to 9:30 am, and you can trade penny stocks during these periods, as well. In fact, some of the biggest moves happen after hours, which makes a normally volatile security like a penny stock extremely volatile.
The mechanism for trading is the same before and after hours, with orders placed through your online broker service. You may have to pay an extra fee for after-hours trades, so check with your broker.
The thing to keep in mind is that AHT can be extremely risky, especially with penny stocks. This is due to several reasons:
- Even lower than normal liquidity. As any penny stock trader knows, liquidity is a major issue, even during normal hours. After hours, you may find it nearly impossible to fill an order. Even if you wanted to take advantage of a sudden after-hours price spike, chances are good you wouldn’t be able to find a buyer.
- Wide spreads. This is a function of low liquidity after hours, which means that the spread between the bid and ask price will be much higher, and again, you may not be able to execute the trade at a favorable price.
- The biggest players in AHT are institutional investors, who have access to far more capital than retail investors. Although you feel the effects of institutional buyers during normal trading hours, they’re even more pronounced after-hours. This isn’t necessarily an issue with penny stocks, since they tend to be off the radar of most institutional investors but could be an issue if you’re trading a low-priced stock that isn’t a true penny stock.
- Higher volatility. Volatility is a feature, not a bug, when it comes to penny stocks, but the volatility becomes even more pronounced after-hours. Because of the much lower volume of trades happening after-hours, you’ll see larger price swings.
- The news cycle. Major releases about earnings, employment, moves at the Fed all happen outside standard trading hours. These can often magnify the effects of other issues that plague after-hours trading, such as low liquidity and high volatility.
Of course, there are some advantages to trading after hours, as well. For example, some simply prefer trading at off-peak hours, and after-hours trading offers this convenience and flexibility. Volatility can also be a penny stock trader’s friend, in that you may be able to profit off some unexpected price shifts.
Do be aware that the schemes common to penny stocks, such as pump and dumps, are as big an issue in after-hours trading, if not more so. Be extra wary of a stock that sees a huge jump in volume, especially if the price chart has been fairly flat.