Trading session is the period of time during which the trading activity takes place in the stock market. One trading session lasts one day. The start of the session is marked by an opening bell that indicates that the market is about to open while the end of the session is concluded by a closing bell indicating the completion of trading for the day.
After-hours trading takes place after the market has been closed. An investor can buy or sell securities beyond the typical hours of the trading session. In this process, no traditional stock exchange is used. Instead, stockbrokers use an electonic system called Electronic Communication Networks (ECNs) that involves match a potential buyer with a potential seller.
Who Can Participate in After-Hours Trading?
The practice of after-hours trading was initially confined to high-net-worth investors or institutional investors like mutual funds through traditional stock exchange. However, ever since the advent of ECNs, everyone has access to trading after-hours which is a good news for individual investors.
During this time period, there are very few active traders since most people choose to trade during the daytime when the market is brimming with opportunities and things are heated. Hence, the trading volume during this time is usually thin unless something significant happens such as late night breaking news, company announcements, company earning releases, and political turmoil.
Types of After-Hours Trading
After-hours trading is categorized in terms of time of the day during which it takes place
Pre-market trading entails trading before market opens, usually in the morning before 9.30 am.
What Are The Benefits of After-Hours Trading?
Some of the benefits of after-hours trading includes:
After-hours trading allows you to buy or sell securities without having to wait the next day. This is especially important when a big news has broken out after trading session has already ended, or the company releases their earnings, or make important announcements.
Appealing Stock Prices
During non-active hours, the chances of acquiring good pricing opportunities increase. Although stock prices during this time are highly volatile, you can use this feature to your advantage in the event of a news. When the stock price of a company rises momentarily during after-hours, traders can buy or sell without risking the prices going down the next day.
What Are The Risks of After-Hours Trading?
After-hours trading also carries some potential risks:
During after-hours, there is a lack of active participants which means that the trading volume is considerably low for your stock. This means that there is a decreased demand and supply during these hours and it is harder to convert shares into cash.
Since the trading volume is low, it is hard to find a buyer or seller who agrees to the price you are asking for. There is a widespread gap between the bid and the ask prices.
Since after-hours trading was initially meant for institutional investors, individual brokers will have a tough competition in face of these big corporations.