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How does after-hours trading affect stock prices?

How does after-hours trading affect stock prices?
Asked by
Benjamin Schmitz categorie-icon time-icon6 months ago
1 Answer Answer Question

Sheila Olson
Answered time-icon6 months ago

The major exchanges have normal market hours of 9:30 am to 4 pm Monday through Friday; this is when the vast majority of trades are made. But if you don’t have time to watch your screen and trade during the day, you can trade after-hours on ECNs (electronic communications networks). ECNs operate independently from the exchanges to match buyers and sellers when the exchanges are closed. Before the emergence of ECNs, retail traders couldn’t get in on the after-hours action.

There are actually three trading sessions (all times are Eastern Standard):

  • The regular market (9:30 am to 4:00 pm)
  • After-hours market (4:00 pm to 8:00 pm)
  • Pre-market (4:00 am to 9:30 am)

Although you’re technically trading off the exchanges, the process works exactly the same.

The main thing you should keep in mind about after-hours and pre-market trading is the significantly lower volumes. Lower trading volumes mean much higher volatility, because so few trades, relatively speaking, are taking place. There may also be liquidity issues, in that you may not be able to find a trading partner to execute your trade.

Because of the volatility and price swings, you must be diligent about using limit orders when you are trading outside regular market hours.

Although volatility is probably the most noticeable price effect in after-hours trading, you may also see price movement as a result of breaking news or new information about an equity released after the market has closed. Watching price movements is a good way to gauge the way the market will respond on the next day’s opening, which may position you to make profitable trades.

However, the next day’s opening price may not necessarily reflect price changes in after-hours trading. For example, if trading activity after-hours drives up a stock’s price on rumors of a potential merger, new information rebutting the rumor may surface before opening bell and selling pressure may drive the price down well below the highs in after-hours trading.

In other words, don’t rely on after-hours and pre-market price movements to predict prices once the market opens on the next trading day. After-hours trading is definitely riskier, but if you go into it with eyes wide open, and take appropriate steps to limit your losses, you may make some very favorable trades.

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