Trading Stocks After Hours

Trading stocks after hours used to be reserved only for large investors but now all investors can take advantage of after hours trading thanks to the use of electronic communications networks or ECNs. ECNs are private trading systems that pair up buy and sell orders at prices dictated by the investor. They were first authorized in 1998 and have enabled millions to participate in after hours trading.

An electronic communications network is a system or network that eliminates the need for a third party so that exchanges may be made by an exchange market maker or over the counter market maker. To trade on ECNs an investor (including individual investors) must have a broker dealer subscription. It’s important to realize, however, that trading stocks after hours differs from trading during regular hours and after hours trading is often considered riskier riskier. ECNs have paved the way for individuals to conduct trading on their own behalf and many find the flexibility of trading after hours offers more control over their financial portfolio. After hours trading typically runs from 4:00 pm ET until 6:30 pm ET. Though many enjoy the flexibility provided with after hours trading; there are several risks involved that must be considered.

Since there are more buyers, sellers and active trading underway during regular market hours, the investor who participates in trading stocks after hours may find there is considerably less action going on. This reduces the amount of liquidity as well as marketability. Less liquidity means investors may have a difficult time converting their shares to cash. To turn shares into cash an investor needs buyers and sellers with whom they can trade readily with. As there are less investors participating in after hours trading it becomes more difficult to trade stocks. Some stocks may fail to trade during after hours.

Another problem common to after hours trading is the inability to see quotes. When trading after hours it is imperative to determine whether or not your broker’s firm will allow you to see quotes on other electronic communications networks. You may find that you are limited to see quotes on other ECNs and if this happens, you may not be able to trade with different systems. Another problem focuses on prices. The prices of stocks may differ during after hours or premarket hours. This can make buying and selling more difficult.

As all activity after hours is conducted over electronic communications networks it is possible to encounter computer issues due to delays on the network in use. These delays can cause great frustration to the investor who may be trying to cancel, change or execute orders. Since the majority of investors participating in after hours trading are professional traders, individual investors may find the completion grueling and discover they are trading against large firms that have access to information that the individual investor doesn’t have.

Most electronic communications networks only accept limit orders. This can cause delays and problems for the investor who is trying to execute orders. A limit order is described as an order to buy or sell a set number of shares that have been limited to a specific price. Limit orders may also determine the specific time frame for the order. As there is a lack of liquidity with after hours trading and prices may fluctuate more during this time than with regular trading hours, limit orders help ensure that stocks are sold or bought at a specific price. There may be issues, however, if the markets shift away from your limit order. Some brokers may not execute these orders and you must determine whether or not your order is cancelled or will automatically be placed during regular trading hours.

After hours trading is very volatile and prices fluctuate more so than they do during regular trading hours. This is partly due to late breaking news that may be covered after 4:00 pm. Breaking news stories will greatly impact the markets and as those trading during after hours tend to be heavy hitters, prices can fluctuate greatly. Since there is noticeably less active trading conducted during after hours the chance of greater quote spreads is increased. This means that it may be more difficult to sell your stocks at the price you want.

Most experts agree that those who participate in trading stocks after hours should stick with limit orders as this offers the most protection. It is also quite possibly the only type of order many trading platforms will accept. You’ll find that the majority of action conducted during after hours trading is often directly related to news. Due to the risks involved, many find that trading stocks after hours is not the best choice for those who wish to trade stocks quickly. For these reasons, it is recommended that new investors become experienced trading during live market hours before embarking upon after hours trading.

After hours trading should not be confused with late day trading as late day trading is an illegal practice. After hours trading is perfectly legal and an acceptable way of buying and selling stocks. Late day trading is the practice of buying hedge funds then selling securities. The activity takes place after markets close but are conducted in a manner to make them appear as if they were conducted during open trading hours.

Though there are many risks involved with after hours trading there are also benefits. Just as breaking news stories may make prices fluctuate, news can also motivate individual investors to make decisions quickly and without a lot of competition. When you find prices that fit in with your financial plan you’ll find that trading stocks after hours can have many benefits.