What are the main risks of after-hours trading?

By Ryan C. Fuhrmann AAA
A:

Traditional stock market trading hours in the United States run from 9:30 a.m. to 4:00 p.m., Eastern Standard Time. But back around the year 2000, after-hours trading was introduced to the marketplace. This includes an early morning and late afternoon/early evening session. More than a decade after the introduction of these extended hours, there are a number of important risks for investors to be aware of.

The primary risk is that there is significantly less liquidity outside of standard trading hours. A lack of liquidity can adversely influence stock prices and bid/ask spreads. Because there are less shares to trade, stock prices can be more volatile. Of course, this could mean being able to buy a stock at a lower price than during normal hours, but it can also mean paying a higher price, or having to sell at a lower price. Less liquidity also suggests larger bid/ask spreads, which can mean a wider spread between the price investors are able to buy or sell a security. The closer these two prices are, the less costly it is to move into and out of a stock price.

Share price quotes may also be less readily available outside of regular trading hours. This can be because of the simple fact that there are less market participants actively quoting prices from the greater activity during the regular trading day. A lack or delay in quoting can result in more volatility. 

Additionally, companies usually release earnings or material news events outside of regular trading hours to let investors read over and digest the news. Trading right before or after significant news flow could result in knee-jerk reactions that would have settled out inside the normal trading day. 

Finally, institutional and sophisticated investors account for the bulk of volume during extended trading hours. This could put smaller investors at a disadvantage, especially considering the other risks.

The Bottom Line

There are significant risks for smaller investors that trade outside the regular stock market trading day. They could look to use share price volatility to their advantage, but there are just as many pitfalls that could hurt their ability to invest profitably.

 

 

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