Trading stocks can be a bit difficult sometimes because stock prices change continuously. If you are an investor trading after hours fearing stock spikes, let us help you find the answer to the question – Why do stocks spike after hours?
Stocks spike after hours because of the low volume and liquidity of stocks. So, the potential participants are few, and the intrinsic value of stocks is greater than normal. Although it seems a profitable trade, it comes with several risks.
Keep reading, and you will find every information regarding stock spikes, premarket, or after-hours trading. Also, the associated benefits and risks with extended hours of trading. Moreover, If you are looking for how to trade during extended hours, we have tried to cover all your queries, even the whole process.
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What Is Premarket Trading?
Premarket Trading – the name says it all. The trading begins one hour before the normal market hours (9:30 am – 4:00 pm). The normal trading hours are 8:00 am to 9:30 am ET. It is carried out through ECN (electronic communication networks).
The main reason for trading at extended hours is to give investors like you to react to news disclosed after the regular market has closed. News changes the value of stocks quickly. Many companies usually announce their earnings reports after market hours. Traders take it as an indicator and decide whether they want to buy or sell.
So, traders prefer to trade during premarket hours to gain an advantage over competitors. It is important to remember that you cannot trade some stocks during pre-market hours. Some of the securities not available to trade at these hours are options, small-cap stocks, and stocks having minimized float.
How To Trade During Premarket?
It is quite easy to trade stocks during pre-market hours, but it comes with certain risks. When trading during Pre Market hours, you will need to follow the following steps:
Login To Your Brokerage Account
If you want the favor to be on your side, you will need to grab opportunities, i.e., stocks, before your competitors. So the first thing you need to do is login into your account.
Decide Your Trade
Next, you must select a specific stock you want to trade. Provide some related information, for instance, the ticker symbol, the number of stocks, and your preferred type of order. The limit orders will favor you if you want to carry out a premarket trade. Speaking of limit orders, it depicts that a trader has agreed to buy a specific stock at a certain price.
Set Your Conditions
If your broker offers to choose, you must specify the exact time for the order’s execution. You will have 3 choices. Here, have a look at them.
- In Regular Trading Hours – Your order executes when markets are highly liquid, i.e., during regular market hours.
- In Regular and Extended Hours – Your broker will decide whether your order will take place in regular, premarket, or after-hours sessions.
- In Extended Hours – You can only execute your order during pre-market or after-hours sessions.
Place the Trade
When you have set your conditions, let your broker know. Don’t worry if your order is not executed. Remember that for a trade, both parties (buyer and seller) must agree to the terms.
What Is After Hours Trading?
Well, the action goes on in the market even after its official closure. After-hours trading refers to the exchange of stocks between 4:00 to 8:00 pm ET. To execute after-hours trading, the electronic communications network comes into action.
When the entire New York stock exchange market devotes 6 hours every day for a week (except Friday), why do investors wait until after the market’s closure? Let’s answer this query. The reason behind this is the benefits of after-hours trading. The potential risks are also involved in it.
How To Trade After Hours?
The process of trading after hours is the same as pre-market trading. For the first step, you must log into your online trading account. After logging in, you will be asked to choose which stocks you want to trade. After you choose your preferred stock, you need to select the type of order.
If you wish to trade after hours, there is a restriction for you to follow. That is limit orders. Yes, you heard it right. Only limit orders option is available during after-hours trading. That’s because of the low trade volume. Then comes the final step – Execute the Trade.
Facts Used In PreMarket/After-Hours Trading
For your PreMarket or After Hours trading to be successful, you need to know certain tactics and facts. Here we have described some facts that will come in handy for you during your trade. Let’s have a look at them:
Before making a trade, ensure you have a keen knowledge of market/economic indicators. These indicators are responsible for the movements in the market. Some indicators are GDP (gross domestic product), Inflation, CPI (consumer price index), US unemployment rate, etc.
According to Luke Lloyd, the know-how of these data points is necessary. You need to use these data points in your favor to buy or sell stocks effectively.
Corporate Earnings Announcements
Always look out for corporate earnings announcements if you want to gain the upper hand over other investors. As discussed earlier, the stock market is evidently affected by the corporate earnings release. When a company releases its statements, its share prices increase or decrease. Increased share price results in a significant boost in the company’s intrinsic value and vice versa.
Long-term investors should keep an eye on earnings. If you are chasing a specific company for a very long time, this will help you predict its market conditions. And you will be able to predict and decide efficiently.
Index futures help investors predict the price changes of equity on a certain index. It is also used to keep tabs on underlying indexes. Some underlying indexes are S&P 500, Nasdaq, or Dow Jones Industrial Average. Trading index futures helps investors identify the opening price of a certain stock for the next day.
The futures market wouldn’t be crucial if you were a long-term investor. But it can help you predict market volatility. It might draw some good opportunities for you.
Pros Of Trading Premarket/After Hours
Trading PreMarket or After hours session comes up with the following advantages. Let’s have a look.
Appropriate For Investors
Regular trading session is more convenient now for investors having busy schedules during the day. They can easily access extended hours and gain trade benefits.
Ability To Trade News
You can trade stocks right after a company issues its statements. It will help you analyze and predict a potential increase or decrease in a company’s value. So you can decide properly whether you want to buy or sell the stocks.
Take Over Other Traders
Traders can take over their competition by executing their orders during pre-market and after-hours. They don’t have to wait for the next day’s schedule.
Cons of Trading Premarket/After Hours
Some significant cons are attached to the trade in PreMarket or after hours trading session. Here we have listed some for your knowledge.
It means that your order might still need to be executed. This happens because only a few traders are present during extended hours. Stock being highly volatile during after hours is another reason for the illiquidity.
Stock being highly volatile during after-hours is another reason. Volatility refers to low volume and significant changes in stock prices. If you are a newbie trader, trade on regular hours. But if you want to shift to after-hours, you must keep an eye on indicators, etc.
Only Limited Orders
During pre-market and after-hours, you can only choose limited orders for trading. That is because of low trading volume after hours. Whereas during market hours, you can have all the advantages like being free to choose the type of order you want.
Risk Of Premarket & After-Hours Trading
SEC (Security Exchange Commission) has outlined the risks involved in Pre Market and After Hours trading. If you are a newbie in this trading game, some risk management strategies will greatly help you.
Inability To See Or Act Upon Quotes
There comes a limitation for you in quoting. It’s because some organizations enjoy secrecy. They will limit you to a trading system that they are using. You will need help to see their stock quotes on other trading systems. So, consult with your broker firsthand and know which quotes you can spot and which ones you can trade.
Lack Of Liquidity
After hours of trading, executing some trades will take a lot of work. It happens because of low volumes of stocks because fewer participants are present after hours compared to regular market hours.
Larger Quote Spreads
There will be a significant difference in buyers’ and sellers’ bid and ask prices. So, your trade may not go well as planned. The main reason behind it is the shortage of buyers and sellers. The price you set for the trade may not be acceptable to the other party.
During after-hours trading, stock prices change, especially for stocks with low trading volumes. Unlike regular market hours trading, it might not happen. So, if you are trading after hours, beware of trading volume and use relative strategies to overcome the situation.
No stock has certain prices. You cannot guarantee that a stock’s price will rise in regular hours even when it was hiked during after hours. The stock prices of after-hours and regular hours do not reflect each other.
For example, if a stock’s closing rate is $0.80, then it is possible that during after-hours, it is traded at $1.00. Whereas on the very next day, the same stock’s trade rate is again $0.80.
Competition With Professional Traders
Most of the traders trading after hours are usually professionals. They can overcome individual traders with the back of their hands. At the same time, beginners will find it challenging to achieve 100% success. If you are a beginner entering after-hours trading, make sure you trade with your broker by your side at the start.
Bias Toward Limit Orders
During pre-market and after-hours, traders can only choose limited orders. This can be a lag for you. You can face the situation of unfilled trade. Whereas during regular market hours, you will find no issue during trading, and there are no restrictions, i.e., limit orders only (like after-hours trading).
You can face delays and cancellation of orders when trading after hours or during pre-market hours. That’s because of the computer glitches in the online trading system. A human does not monitor ECN after hours. Whereas during market hours, a whole team of professionals, i.e., managers, brokers, and traders, are involved.
Can I Sell Stock Same Day?
Yes, you can sell the stocks on the same day. It is termed day trading. You will need to follow FINRA’s pattern to day trading rules, though. It is very risky, so If you are a beginner, your broker won’t let you do this.
What do After Hours Stock Prices Mean?
The prices on which you execute a trade order after hours (4:00 pm to 8:00 pm) are termed After-hours stock prices. The bid-ask can vary widely because of subtle and continuous movements in the stock’s intrinsic value.
What is the Most Accurate Stock Predictor?
MACD is the most accurate stock predictor. It stands for “Moving Average Convergence Divergence.” It depicts the connection between two moving averages of a stock. It has 2 lines – fast and slow, and both lines are calculated with the help of software.
It helps investors by giving out signals based on the calculations. It’s a buy signal if the fast line crosses the slow line and vice versa.
Why do Most Day-Traders Fail?
Most day traders fail because of not following the trends, overtrading, not doing proper research, and poor risk management. Day trading is risky, and you need to keep tabs on technical indicators and current trends in the market. Failing to do so will lead you to your failure.
Stock spikes when trading in extended hours. That’s because of price volatility and lack of liquidity. Less volume of stocks available to trade means less trade activity. This results in high prices for the available stocks. Pre-market hours trading time is 8:00 am to 9:30 am ET, and After-hours trading is done between 4:00 pm to 8:00 pm ET.
On the other hand, the regular market hours are 9:30 am to 4:00 pm. Each of the above has its advantages as well as disadvantages. It’s up to you what hours you want to trade and what strategies you will use to overcome the risks!