How to Capitalize on After-Hours Trading

Normal stock market hours on the New York Stock Exchange are from 9:30 a.m. to 4 p.m. EST during the week — but outside of normal trading hours, premarket and after-hours trading take over and investors enter into new territory.

Trading stocks can be different during intraday hours versus after hours. For example, exercise equipment company Peloton (ticker: PTON) announced its fourth-quarter earnings on Sept. 10 at 5 p.m. EST. Following the announcement, which showed a surge in sales and customer subscriptions, PTON stock moved higher in after-hours trading.

Trading during extended hours can be a benefit to those who cannot participate during normal market hours. Experienced traders can also fuel their trades by analyzing how the news will impact the market to make strategic purchases right before the market opens.

“Trading outside normal market hours allows investors to reduce or add to their portfolios based on newsworthy events,” says Anthony Denier, CEO of Webull, a commission-free online stock trading platform covering full extended-hours trading in New York City.

The stock market never sleeps. In our global market, there is trading activity around the clock. When the markets close, here’s how overnight activity can influence how the major indices perform when markets open:

— Economic reporting from the federal government.

— Corporate earnings announcements.

— Index futures.

— Risks of before- and after-market trading.

[SEE: Top 10 Dow Dividend Stocks to Buy Now.]

Economic Reporting

The news cycle feeds into before- and after-market trading quickly, which improves liquidity during these hours. This may sound like an appealing opportunity, but it’s one thing to have details and another to know how to act on them — so retail investors should proceed with caution.

Thomas Shohfi, assistant professor at Rensselaer Polytechnic Institute in Troy, New York, says “it’s difficult to capitalize on this because they (retail investors), generally, cannot move as quickly as institutions that can process information and transact accordingly at a much faster speed.”

Professional traders in after-market hours have access to more information than retail investors. According to the U.S. Securities and Exchange Commission, these institutional investors can take on the risks associated with extended-hours trading like price volatility and lack of liquidity because they have sophisticated trading strategies that require them to make 24-hour adjustments to their portfolios that hedge risks.

Economic indicators such as gross domestic product, consumer price index, U.S. unemployment data, U.S. international transactions and changes in U.S. industries move the market.

When the economy is not performing well or is going through a significant event, there are times when the government needs to step in to change economic policies that support growth. The stock market’s reaction following those announcements is a way to gauge investor sentiment toward these policies and whether they’ll be effective.

Investors tend to be supportive of actions positioned to improve stock market returns. In this case, they’ll respond with optimism and are encouraged by the government’s fiscal measures, whereas pessimistic investors are cautious that changes will disrupt or hurt their ability to produce profits.

[READ:Sign up for stock news with our Invested newsletter.]

Corporate Earnings Releases

Companies report quarterly earnings results after a market is closed or before the market opens, which could heavily influence trading activity.

“Corporate earnings and news, like an acquisition or bankruptcy, will have the most effect on single stock prices,” Denier says.

Home-furnishings company RH ( RH) announced its second-quarter results on Sept. 9. After revealing better-than-expected earnings, RH stock jumped in before-market trading on the morning of Sept. 10, and shares surged 20% that day.

Following corporate earnings releases, like the example above, market activity increases and price changes tend to be most evident. Changes that impact a company’s value, like shifts in cash flows or expected growth arm investors with data to make efficient trades. Positive earnings that drive up the intrinsic value of a company may see its stock price increase, while lower-than-expected earnings could see declines in a company’s stock price.

“Investors can capitalize on these specific events by getting into or out of a position by trading in the extended-hours market with the idea that they will be first to act on these events,” Denier explains.

Earnings are an important component for long-term investors to consider. Leading up to these announcements, investors who have been following a company for a while may be able to predict earnings results and make market decisions based on their anticipations.

Index Futures

The futures market allows market participants, namely manufacturers and producers of commodities, to buy commodities like wheat, corn, coffee or precious metals during a particular time in the future and at a specific price. This allows businesses to manage risk and market volatility.

A futures contract provides market participants a chance to lock in a fixed price of goods as a way to hedge exposure to fluctuating prices. Futures trade 24 hours a day and are a part of a forward-looking global market. International market movements can be seen in the increase or decrease in index futures as stocks are bought and sold globally.

All markets are bound together at the hip, says Clem Chambers, CEO of ADVFN, a global stock market advisory website.

This market volatility can present buying and selling opportunities for experienced traders.

Traders or investors can use futures as a way to speculate the direction of equity prices and overall index performance. Speculation can be a risky strategy to manage investments since prices are subject to change — but the upside, if a trader is correct, can result in significant gains.

Futures track an underlying index such as the S&P 500, Nasdaq or Dow Jones Industrial Average. Contracts for futures derive their value from the performance of the underlying index, which is why they are called derivatives. Investors can trade index futures to predict whether the price of equities on an index will rise or fall.

[See: How to Pick Stocks: 7 Things All Beginner Investors Should Know]

Risk of Before- and After-Market Trading

Retail investors who are curious about what goes on during premarket and after-market hours must know that trading during these times is far riskier compared with normal market hours.

In premarket trading hours, there is low trading volume — so if you want to move in and out of positions quickly, it’s increasingly difficult to do so during after-market hours, making traders more susceptible to losses.

“Illiquidity and volatility risks are the biggest concerns for investors,” Denier says.

The lower trading activity can also result in a wider bid and ask spreads, which means it can be difficult to get your order executed at a suitable price. Furthermore, prices in the extended-trading windows may not reflect the price during regular trading hours and may result in a poor return on your transaction.

Inexperienced investors may enter a position but may not be able to find a buyer as easily as during normal trading hours. Due to the low momentum in the market during this time, there is a lot of price volatility, so it’s difficult to gauge the market value of a stock.

“Due to the limited number of participants during extended-hours trading, the volume is smaller than normal and therefore price swings and spreads can be much more pronounced,” Denier explains.

Unless you’re an experienced investor who understands the ins and outs of trading outside normal market hours and can weather the associated risks, it may be best to stick to normal market hours.

More from U.S. News

Factors That Could Derail Stocks in Q4

Book Value vs. Market Value: The Key Differences

10 of the Best Tech Stocks to Buy for 2020

How to Capitalize on After-Hours Trading originally appeared on

Related Categories:

Latest News

More from WTOP

Log in to your WTOP account for notifications and alerts customized for you.

Sign up