After Hours Stock Trading

After Hours Stock Trading – Tips, Tricks and Traps To Be Aware Of

A few of my Members have asked me questions about after hours stock trading.

As most of you know, the main stock exchanges – such as the New York Stock Exchange and the NASDAQ Stock Market - are only open from 9:30 a.m. until 4:00 p.m. Eastern Standard Time. That’s when most of the trading is done.

Trading “after hours” – outside of that time frame – has actually been going on for some time. But that used to be reserved only for the rich – high net-worth individual investors or institutional investors. However, since the turn of the century, it’s been possible for us “little guys” to get into after hours trading.

Some of the questions I’ve been asked include the following:

1)         How do I trade after hours?

2)         What brokers allow after hours trading?

3)         What are the benefits and risks of after hours trading?

4)         Where do I go for after hours trading information?

Let’s see if I can answer those questions.

As far as how you trade after hours – the mechanics – this became possible with the rise of ECNs – Electronic Communications Networks. ECNs are electronic trading systems that automatically match buy and sell orders at specified prices. ECNs register with the SEC as broker-dealers.

In order for an individual investor to trade after hours, they must have an account with a broker-dealer subscriber before their orders can be routed to an ECN for execution. ECN subscribers typically use limit orders to buy or sell securities. ECNs post orders on their systems for other subscribers to view. The ECN will then automatically match orders for execution.

For more information on ECNs, the SEC has a good explanation on their website:

http://www.sec.gov/answers/ecn.htm

Most major brokers now allow after hours trading. However, you should consult your broker and read any disclosure documents on this option. Check your broker's website for available information on trading after-hours. As with trading during regular hours, the services offered by brokers during extended hours vary. You should therefore shop around to find the firm that best suits your trading needs.

There are several benefits of trading after hours, but the main one is simply being able to take advantage of news that will positively or negatively affect the stock on the open the following regular trading day. News such as positive or negative earnings reports, new contracts, FDA approvals, etc. very often occurs after hours. This news often causes the stock to gap up or down on the open the next day.

There are many risks in after hours trading as well. These include the following:

1)         Inability to See or Act Upon Quotes.

2)         Lack of Liquidity.

3)         Larger Quote Spreads.

4)         Price Volatility.

5)         Uncertain Prices.

6)         Bias Toward Limit Orders.

7)         Competition with Professional Traders.

8)         Computer Delays.

The SEC has a great summary of these risks on the following page:

http://www.sec.gov/investor/pubs/afterhours.htm

Finally, the SEC has a Special Study on Electronic Communication Networks and After-Hours Trading. After a quick review, I think this page should have almost everything you need to know about after hours trading:

http://www.sec.gov/news/studies/ecnafter.htm

There are several other good websites for after hours trading information. These include the following sites:

1)         http://quotes.nasdaq.com/asp/MasterDataEntry.asp?page=After%20Hours%20Market

2)         http://www.tradingday.com/

3)         http://www.marketwatch.com/tools/stockresearch/screener/afterhours.asp?siteid=mktw

4)         http://money.cnn.com/data/afterhours/

5)         http://www.midnighttrader.com/

As you can tell, after hours trading is not for the beginner, nor for the faint of heart. Yes, there are certain rewards, but many risks as well. As with anything else to do with trading and investing, do your homework! Take the time to do your due diligence, get all the information you can, and then make your decision.

Now, on to business.

The markets are currently doing another “swan dive” move like they did a few days ago – up nicely in the morning, but now taking the dive. There’s a battle going on as far as what news is most important today.

The good news is that weaker-than-expected housing data soothed interest rate concerns ahead of next week’s Fed policy meeting. The bad news is that crude oil futures climbed back above $64 to their highest levels in a week. It will be interesting to see where the market ends up today by the close.

Here’s a stock at its own high for the week…

Our stock for review today is LAYN – Layne Christensen Company.

LAYN is doing a nice base breakout on volume 122% above normal.

It’s “plain” to me that LAYN might be good for your portfolio!

And remember, whether doing after hours stock trading or otherwise, do your due diligence and know what your risks vs. rewards are at any time!