What Investors Need to Know about After-Hours Trading

After-hours trading refers to buying or selling securities outside regular market hours. After-hours trading usually starts at 4:00 pm and ends at 8:00 pm of a trading day, but this may vary by specific security exchange.

People trade during after-market hours for many reasons. Some do after-hours trading because they are on the lookout for unique investment opportunities. Some just find after-hours trading more convenient than regular-hours trading.

Drawbacks of After-Hours Trading

Whatever its benefits, after-hours trading definitely comes with a number of risks. The risks are mainly rooted on the limited trading activity that occurs outside regular trading hours. The following are a couple of problems that after-hours traders may experience:

• Inability to find a buyer or seller

  Since there's limited trading during the after-hours, it's usually more difficult to find a buyer or seller during the after-hours than during regular hours. If you can't find a seller for some of your securities, you'll have less liquidity. During the after-hours, therefore, you may be unable to fully take advantage of potentially lucrative trades.

• You may pay higher than you would normally pay

  When there's limited trading activity, spreads are usually larger. Interested investors may be turned off by such large spreads. This makes it even harder to execute a favorable trade. After-hours prices may also be higher than their regular market prices.

Things You Should Ask Your Broker before Doing After-Hours Trading

Before you do some after-hours trading, you'd better ask your broker the following questions:

1. Is trading outside your brokerage firm's ECN allowed?

   Brokerage firms use an electronic communications network (ECN) to provide after-hours trading services to their clients. Some firms let their clients access ECNs other than the one they use. Some, however, limit their clients' access to only one electronic trading system.

   You don't want a limited or restricted ECN setup. If you cannot see the quotes on other ECNs, you'll have limited trading options.

   Access to quotes from other ECNs is not enough, however. Make sure that trading with someone on another trading system is allowed. Otherwise, you won't be able to buy from or sell securities to investors on other ECNs and you won't be able to maximize the benefits of after-hours trading.

   Before doing some after-hours trading, therefore, be sure to ask your broker about their ECN policies.

2. How good is your broker's electronic relay system?

   Trading after hours is done electronically. Typically, orders placed after hours go through the broker's servers, which in turn route them to the ECN the firm uses.

   The efficiency and reliability of your brokers' computers therefore have a significant impact on your after-hours trading experience. Before you trade in the after-hours market, find out how fast and how reliable your broker's computer system is.

3. What does your broker do to unprocessed orders?

   Find out what happens to orders that have not been executed within the after-hours trading window. Will unprocessed orders be automatically entered and placed on your behalf when regular trading resumes the next day?

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