For beginners, it’s common knowledge that the stock market has regular trading hours. The market is open between 9:30 am and 4 pm except for holidays and weekends. In the US market alone, billions of shares of stocks are traded, making them very liquid and efficient.
However, the stock market is also open before and after the regular trading hours. Premarket and aftermarket sessions let traders trade between the hours of 4 am and 9:30 am for premarket and 4 pm to 8 pm for the after-hours.
Reactions to Company Announcements
Companies usually announce important information such earnings reports with attention to timing and strategy. These businesses do not make announcements during regular trading sessions it could trigger wild knee-jerk reactions that could not reflect the true value of the stock.
For instance, if the company announces during regular market sessions a loss in the previous quarter in their earnings report, huge selloffs can mean unwarranted losses for the company.
However, the value of the stock can still move even when the market isn’t in its regular trading hours. Investors want to gain access to that value changes, which makes the after-hours sessions important.
Thus, if you trade when these announcements come out, it means you’re better able to react to the news. Once the market opens, the share prices will have already moved, making the stock reflect their fair value. And if you’ve already reached that point, it may be too late to make the trade.
Many economic announcements and releases come out at 8:30 am, which is just an hour before trading starts in New York.
The market reaction to these news items can cause wild movements in price and set the tone for the day’s trading.
For instance, the US jobs report that is released every first Friday of the month has one of the most significant impacts on the stock market.
When the data comes worse or better than expected, investors can expect volatility in the market.
Problems with Liquidity
Before, trading after-hours was exclusive to institutional investors; retail investors did not have access to the after-hours market.
However, because of the rise of computerized trading, retail investors now have access to these markets.
But before you start trading in this market, you have to remember that there may be some problems with liquidity. These markets are less liquid than the regular ones.
At the same time, you may not be able to sell your stock because are only few people trading. If the earnings announcement turns out worse than expected and you want sell your shares very quickly, you may not be able to do so, particularly with smaller, non-blue-chip stocks.
Wider Spreads and Greater Volatility
You should also consider the factors of spread and volatility. The spreads may be wider than usual, meaning the numbers of traders haven’t agreed on a fair price. Thus, you may be forced to settle for a price that’s far from a fair value.
Lastly, because after-hours sessions are usually made up of professional traders, the volume is low, and higher price volatility may be present.