Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I've heard people say is foolish to buy stocks after hours. Why do they say this?

share|improve this question
5  
Why don't you ask them? Who are these people and where have you heard them? –  littleadv Dec 1 '12 at 0:24
3  
Another way to phrase a question that is more answerable could be.."Are there any risks in buying stocks after hours?" I see I have the ability to place X kind of order after Y exchange is closed. I was hoping to achieve Z benefit, but I have heard that there is risk A and B. What should I be concerned about, and what kind of risks am I exposing myself to if my goal is X ?" –  MrChrister Dec 1 '12 at 5:06
    
that isn't an absolute –  CQM Dec 1 '12 at 17:43
    
Because after hours, the liquidity is low, so the market is more vulnerable to manipulation. –  Victor123 Feb 18 at 22:29

4 Answers 4

up vote 8 down vote accepted

There are several reasons it is not recommended to trade stocks pre- or post-market, meaning outside of RTH (regular trading hours).

  • Liquidity is very low compared to RTH
  • Fills of market orders can be way off your ordered price (= possibly higher slippage than in RTH) because of low Liquidity
  • If you use a leveraged account, pre- and post-market margins are significantly higher than during RTH

Since your question is not very detailed I have to assume you trade with a time horizon of at least more than a day, meaning you do not trade intra-day. If this is true, all of the above points are a non-issue for you and a different set of points becomes important.

  1. Enter and exit trades during post-market or
  2. enter and exit trades at market open, using orders you enter one day before in the post-market session - those orders will be executed automatically or
  3. enter trades via Limit and Stop Limit Orders exclusively

As a general rule, using (3) is the safest regardless of what and how you trade because you get price guarantee in trade for execution guarantee. In the case of mid to longer term trading (1 week+) any of those points is viable, depending on how you want to do things, what your style is and what is the most comfortable for you.

A few remarks though: (2) are market orders, so if the open is quite the ride and you are in the back of the execution queue, you can get significant slippage. (1) may require (live) data of the post-market session, which is often not easy to come by for the entire US stock universe. Depending on your physical execution method (phone, fax, online), you may lack accurate information of the post-market. If you want to execute orders based on RTH and only want to do that after hours because of personal schedule constraints, this is not really important.

Personally I would always recommend (3), independent of the use case because it allows you more control over your orders and their fills.

TL;DR: If you are trading long-term it does not really matter. If you go down to the intra-day level of holding time, it becomes relevant.

share|improve this answer
    
Good answer. Thanks for stopping in! –  MrChrister Dec 6 '12 at 21:09

During market hours, there are a lot of dealers offering to buy and sell all exchange traded stocks. Dealers don't actually care about the company's fundamentals and they set their prices purely based on order flow. If more people start to buy than sell, the dealer notices his inventory going down and starts upping the price (both his bid and ask). There are also traders who may not be "dealers", but are willing to sell if the price goes high enough or buy if the price goes low enough. This keeps the prices humming along smoothly. During normal trading hours, if you buy something and turn around and sell it two minutes later, you'll probably be losing a couple cents per share.

Outside normal market hours, the dealers who continue to have a bid and ask listed know that they don't have access to good price information -- there isn't a liquid market of continuous buying and selling for the dealer to set prices he considers safe. So what does he do? He widens the spread. He doesn't know what the market will open tomorrow at and doesn't know if he'll be able to react quickly to news. So instead of bidding $34.48 and offering at $34.52, he'll move that out to $33 and $36. The dealer still makes money sometimes off this because maybe some trader realized that he has options expiring tomorrow, or a short position that he's going to get a margin call on, or some kind of event that pretty much forces him to trade. Or maybe he's just panicking and overreacting to some news.

So why not trade after hours? Because there's no liquidity, and trading when there's no liquidity costs you a lot.

share|improve this answer

Unless you want to be a short term day trader, then it is not foolish to be an end of day trader. If you are looking to be a medium to long term trader/investor then it is quite acceptable to put orders in after market close. Some would say it is even less risky, because you are not watching the price fluctuate up and down and letting your emotions getting the best of you.

share|improve this answer
1  
Victor - Kirk isn't asking about putting a order in for the next day, but trading in the "after hours" market which in the US is a trading session that occurs for a few house after the market has closed at 4pm. Often the bid/ask spreads are quite wider than during he day, and liquidity (volume) is lousy. –  JoeTaxpayer Dec 3 '12 at 4:57
    
@JoeTaxpayer, didn't know about that. We only have a 10 minute after market auction from 4pm to 4:10pm. But I guess I had also referred to MrChrister's comments above where he writes: "I see I have the ability to place X kind of order after Y exchange is closed" in formulating my answer. –  Victor Dec 3 '12 at 9:17
1  
see en.wikipedia.org/wiki/Extended_hours_trading - it gives more details. MrC was just trying to help the OP rephrase the question in response to the prior comment, I believe. –  JoeTaxpayer Dec 3 '12 at 15:11
    
Yup. I was hoping the OP could give some details so we can try and answer it. –  MrChrister Dec 3 '12 at 19:05
    
@JoeTaxpayer, yes I realise what he was trying to do, but as MrChrister demonstrates, the OP's question is not very good, so I made some assumptions on the information provided (not being aware of the extended trading hours in the US market). –  Victor Dec 3 '12 at 19:52

The sentiment is because between closing and opening a lot can happen, and between opening and the time your order actually goes through, even more can happen.

An after-hours trade has an extra amount of short-term risk attached; the price of a stock at the opening bell is technically the same as its price as of the closing the previous trading day, but within a tenth of a second, which is forever in a computerized exchange, that price may move drastically one way or the other, based on news and on other markets.

The sentiment, therefore, is simple; if you're trading after-hours, you're trading risky. You're not trading based on what the market's actually doing, you're trading based on what you think the market will do in the morning, and there's still more math going on every second in the privately-held supercomputers in rented cubes in the NYSE basement than you could do all night, digesting this news and projecting what it's going to do to the stocks.

Now, if you've done your homework and the stock looks like a good long-term buy, with or without any after-hours news, then place the order at 3 in the morning; who cares what the stock's gonna do at the opening bell. You're gonna hold that stock for the next ten years, maybe; what it does in 5 seconds of opening turmoil is relatively minor compared to the monthly trends that you should be worrying about.

share|improve this answer
4  
"the price of a stock at the opening bell is technically the same as its price as of the closing the previous trading day" - absolutely not. During the post market (4-8PM) and premarket, anything can happen. Look at 5 day charts, the opening price matches up sometimes, but more often than not, it's off by a visible number. The after hours session is its own bid/ask, it's not late orders waiting for tomorrow to fill. –  JoeTaxpayer Dec 5 '12 at 0:17

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.