Many newcomers to trading wrongly believe that when the market closes at the end of the day, the value of stocks and other assets will remain the same until the bell is rung to start the next session.
But this isn’t true, and the reason for that is after-hours trading.
You can trade once the stock market in London, New York, and elsewhere has closed for the day. While you can only place limit orders to buy and sell a particular stock, the hope is that you can continue to profit while institutional investors have retired for the day.
There are risks attached with after-hours trading – there’s typically less money flowing into the market. With lower liquidity comes wider spreads, but trading after hours can enhance profitability around the clock for savvy investors.
To understand how after-hours trading can affect a stock’s price ahead of the next session, we need to comprehend how it works in the first place.
In the wee small hours
As you may be aware, each of the stock markets around the world have their opening and closing times set in stone.
In London, the opening hours are 08:00 to 16:30 GMT from Monday to Friday, while in New York, investors can open and close positions between 09:30 and 16:00 local times – that’s 14:30 to 21:00 in the UK.
But stocks and assets like Bitcoin don’t cease to exist outside of these times, and indeed there are stimuli – more on those in a moment – that can significantly alter the price of a share in the evening or small hours of the morning.
To take advantage of these situations, you can trade after hours on a limited basis – attempting to lock in a profit from price swings.
Your broker can submit your orders to the Electronic Communication Network (ECN), and there, your open positions will sit until they are ‘matched’ with another buyer or seller. At that point, your trade will be executed at your chosen parameters – if it is not matched, then your order will be cancelled before the next session.
It is worth noting that some brokers offer a more comprehensive after-hours trading experience than others, and you should do your research in that department – this eToro review 2021 is a decent place to start.
What can impact stock prices after hours?
As you probably already know, several triggers can affect a stock’s price.
Of those, the main one to look out for is earnings reports – remember, these can be released into the public domain during the ‘after hours’ period, and so a period of volatility – even though the market is technically closed – will follow.
Often, rumors and speculation of strong or weak earnings alone will be enough to move the needle of value.
In reality, anything that changes investor sentiment towards a company will ultimately impact stock values – whatever time the scenario plays out.
It could be a change of CEO – Jeff Bezos sold $5bn in Amazon stock before announcing his resignation to protect his value, an election result, news of a supply chain breakdown or a new trade deal, information about a competitor that has a knock-on effect. There are so many different variables to consider.
A new day
So there you have some reasons why a stock will open at a different price to the one it closed at the end of the previous session.
Be aware that many institutional investors and those employed by capital management firms don’t trade in the after-hours market. So there will be significant price action within that first hour or so of trading – especially when a noteworthy event has unfolded.
That pressure can see the market regress to its mean. For example, let’s say a firm has unveiled a positive earnings report. That will naturally see an increase in buy orders in the after-market, which will become selling positions as the price inflates at the opening bell of the next session.
As touched upon already, the after-hours market can be incredibly volatile and yet illiquid, and that creates a lack of equilibrium for investors – a scenario that is often reflected in a mad first hour of the stock market the next day.
Swing traders and those that feast on price surges and drops will be in their element, but for traders of a more conservative nature, note that the switch from the after-market to the opening of the main sessions next time around can be a risky time to execute orders.
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