by Amanda Harvey
Benefits of Trading Outside Regular Hours
One of the greatest benefits of after-hours trading is that investors have the opportunity to react swiftly to news or other events occurring outside regular trading hours. Furthermore, despite, or perhaps due to, increased volatility during extended hours trading, it is possible to find some worthwhile trading opportunities.
Limitations of After Hours Trading
There are certain limitations in regard to the types of trading that may be conducted during extended hours. During extended hours trading, only listed equity symbols are available for trading. Other types of securities, including options, may only be traded during regular hours.
There is also a limit to the type of orders that are permitted during extended hours trading. Investors may place buy and sell limit orders, and may also sell short and buy to cover limit orders. Any other types of orders are executed during regular trading hours. There is also a limit to the size of orders that are traded during extended hours, and all or none orders are not accepted outside regular market hours.
Risks of Extended Hours Trading
There are several drawbacks which an investor may encounter when trading after hours.
One such difficulty may be the inability to access buyers or sellers when trading after hours. Some ECNs do not offer integration with other networks, meaning that a buyer and seller may not be able to trade due to the fact that they are using different trading systems.
Reduced liquidity, meaning the ability to convert stock to cash, is a result of the reduced level of trading during extended hours trading. The decreased amount of trading can also create other issues for traders, such as wider gaps between bidding and asking prices. In addition, volatility tends to be higher during extended hours.
How Does After Hours Trading Affect the Market?
Due to extended hours trading, the price that a stock closes at one day is not necessarily the price that it will open at the following day. Substantial price movements can occur during the time between regular trading sessions. It is also common for the trading action that occurs at market opening to be influenced by what has happened during extended hours trading. A stock that has risen or fallen sharply overnight may prompt a flurry of trading activity when the market opens.
After hours trading offers investors the opportunity to act quickly, allowing them to take advantage of situations that arise outside regular trading hours. While there are limitations and risks that apply with this area of trading, there are also potential advantages available to investors as a result of the accessibility of electronic communication networks.