What is after-hours trading?
Looking for an after-hours trading definition? After-hours trading (also known as extended trading hours) refers to buying and selling securities after the main market closes. The electronic communication network (ECN) makes this kind of trading possible around the clock, which means that direct transactions can be carried out digitally or even anonymously, without the need for a broker.
Where have you heard of after-hours trading?
After-hours trading (AHT) is usually used when the stock price opens above or below the previous day's closing price. This may be due to major economic events or company announcements outside of trading hours.
Attributes you need to know about after-hours trading...
When you see the opening or closing bell of the New York Stock Exchange being rung, it is not difficult to imagine that the market has a fixed trading time. In the United States, standard trading hours are from 9.30 a.m. to 4 p.m. (Eastern Time). Trading during normal hours is characterized by high liquidity and a large number of market participants, making it easier for investors to buy and sell securities at good prices. Competition and high trading volumes during standard trading hours also mean that stock prices tend to fluctuate less.
But in recent years, it has also become more common for large investment institutions and individuals to continue trading securities after hours. There are two main after-hours trading sessions:
Afternoon: from 4:15 p.m. to 8 p.m.
Morning: from around 8 a.m. to 9:15 a.m.
There will also be a small amount of pre-market trading at 6 am on a normal trading day. Some traders and investors pay close attention to pre-market trading to judge the direction of the market before normal trading hours begin. However, limited trading volume can create the false impression that a stock is going strong or weak, so only experienced traders are advised to consider pre-market trading.
Electronic Communications Network (ECN)
So how did after-hours trading catch on? It was the development and dissemination of electronic communication networks (ECN) that drove the popularity of after-hours trading. The ECN is an automated system that connects traders with major brokerage firms, enabling them to trade securities from different geographic locations without the need for a stock exchange to act as an intermediary. As in other fields, technology removes barriers and makes possible things that were previously impossible.
Initially, after-hours trading was primarily used by institutional investors. Electronic communication networks allow these large institutional investors to interact anonymously and hide their positions. But over the past two decades, ECN has become more common and user-friendly, and some of them are now designed specifically to meet the needs of retail investors. Examples of ECN include Instinet, SelectNet, and NYSE Arca, the latter of which supports electronic trading on the New York Stock Exchange and Nasdaq.
NASDAQ 100 After-Market Indicator
The development of after-hours trading raised another problem: Initially, investors lacked sufficient sources of information to help them measure market sentiment in after-hours trading. In fact, all investors can do is observe the trading activity of individual securities.
But now there is the NASDAQ 100 after-hours indicator (AHI), which is an index based on the NASDAQ 100 after-hours market trading activity from 4 pm to 6:30 pm (North American Eastern Time). There is also the Nasdaq 100 premarket indicator (PMI), an index of trading activity based on premarket opening prices, from 4 a.m. to 9:30 a.m. (North American Eastern Time).
Both AHI and PMI are calculated on a minute-by-minute basis, using the same method used by the Nasdaq 100 during normal market trading hours. If the stock is not traded after hours, its price will remain at the daily closing price.
Advantages of after-hours trading
After-hours trading has several advantages. Investors can use AHT to react quickly to news reports outside standard trading hours without waiting for the exchange to open the next day. Many important company data, such as earnings, are released at the close of the market. Economic data is also often released outside normal trading hours, although political events that affect the market can occur at any time. As a result, AHT enables investors to execute trades immediately based on the latest information.
Trading on opportunities outside of standard trading hours can be lucrative for traders who keep an eye on the news and take advantage of after-hours price fluctuations. Of course, if the judgment is wrong, it may also cause huge losses. But at the end of the day, after-hours trading offers convenience to those who don't have time to trade during the day.
Risks of after-hours trading
After-hours trading also has some disadvantages, including a lack of liquidity compared to normal day trading. You may see fewer trades and traders during non-standard trading hours, and it is more difficult to find reliable or suitable pricing. In addition, the AHT market tends to be more volatile and price volatility is more intense than during standard trading hours.
In addition, you should be aware that individual investors may face greater competition in after-hours trading, as they face large institutional investors with significant resources and more information. Another disadvantage is that some brokers only allow investors to view the quotes of their own trading system, not the quotes of other ECNs. Of course, calculation delays may also affect the execution of your trades.
Overnight Trading
There are a few more terms you should be aware of-the first is overnight trading. It is often used in conjunction with currency buying and selling between 9 pm and 8 am. Overnight trading is when an investor opens a buy or sell position in another market at the end of the trading day. Overnight trading is considered to be highly risky due to the possibility of events affecting a trader's position before the open.
What is Late-day trading?
Finally, you may also have heard of late trading. Although this sounds very similar to after-hours trading, it is actually completely different. It refers to possible misconduct problems in the mutual fund industry.
A tail-end trade is when the fund manager calculates the net asset value (NAV) of the mutual fund (usually at the end of the trade) the illegal act of accepting a buy or sell order and allowing the investor to pay a price based on the previous net asset value. The practice has been likened to betting after a horse race.
The tail-end trading violates the U.S. federal securities laws that govern the purchase or redemption price of mutual fund shares and deceives other investors in mutual funds by providing tail-end traders with an advantage that other investors do not have. Therefore, it is considered very immoral.
On the other hand, in after-hours stock trading, changes in stock prices are determined by traditional market factors such as supply and demand, so there is no moral problem at all.
