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After-Hours Trades

In the U.S., the stock markets and exchanges (New York Stock Exchange, American Stock Exchange, and Nasdaq) are open from 9:30 a.m. to 4:00 p.m. eastern standard time. What happens when a company announces bad news after the close of the market?

News can affect the stocks in your portfolio, even when the markets are closed. Must you wait until the market opens the next business day to sell your shares? Not necessarily – “if you’re willing to venture into after-hours trading and accept the risks that this type of trading incurs. Some brokerage firms offer after-hours trading that enables you to buy and sell stocks, and possibly avert disaster “as long as you understand the risks.

Since the late 1990s, individual stock market investors have had access to tools and networks that enable them to trade stocks in the hours before and after the market is open. These trading systems, known as Electronic Communications Networks (ECNs), have long been used by institutional investors to buy and sell stocks amongst themselves without using the services (and costs) of a broker.

After Hours Stock Trading

Most major online brokerages today offer extended trading hours through arrangements with one of the two leading ECNs, Archipelago or INET (formed by the merger of Island and Instinet). Ameritrade, E*TRADE, Fidelity, Harrisdirect, Schwab, and TD Waterhouse, to name a few, offer trading both before and after the markets close, although each has different hours of operations, opening as early as 7:30 a.m. and closing as late as 8:00 p.m. eastern standard time.

Placing an Extended Hours Trade

To place an after-hours trade, log in to your brokerage firm’s web site, surf to the trading section, and look for a link to extended hours trading, which is almost always separate from the order screen for regular trading. For example, at TD Waterhouse, you select the Extended Hours tab on the Trading page to place extended hours trades.

At most firms, you’ll be restricted only to limit orders (no market or stop orders) and won’t have the option to specify GTC or AON. Some firms are beginning to offer market orders, and they might even allow pre-open market orders to carry over into the regular trading session if unfilled before the market opens.

Drawbacks of Extended Hours Trading

Before you jump into after-hours trading and place a trade right away, there are some drawbacks to consider carefully. First, after-hours trading is often a jungle. ECNs function by crossing trades “matching buyers to sellers” and therefore lack the liquidity controls that help maintain an orderly market during regular hours. On stock exchanges, a specialist (either human or computer) is assigned to every stock, acting as a traffic cop to keep the flow of buys and sells moving smoothly. If there is a temporary shortage of buyers or sellers in a stock, its specialist will jump in and trade from its own account, assuring liquidity and a certain amount of price stability throughout the day. On Nasdaq, market makers serve a similar role. Without these specialists, a shortage of sellers can dramatically increase the price of a stock, whereas a shortage of buyers can decrease the price.

No specialists or market makers serve the same role on ECNs. As a result, the spreads the difference between a stock’s ask and bid can be quite large. Prices can widely fluctuate from minute to minute. In addition, smaller company stocks often won’t have any activity at all. The prices might bear no resemblance whatsoever to the closing price of the stock or to the next day’s opening – the stock might fall in price in after-hours markets due to panic selling and then recover when the market opens in the morning.

By picking your stock price carefully for your orders and remaining rational about your stocks, you can take advantage of opportunities in after-hours sessions without getting trounced.

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