Yes, you read that right. In fact, there’s a name for it, and it’s called ‘After hours trading’.
Typically, the normal trading hours for the Indian equity market is between 9:15 AM to 3:30 PM, Monday through to Friday. After hour trading allows investors to place orders between 3:45 PM to 8:57 AM for NSE & 3:45 to 8:59 AM for BSE through their AMO or After Market Order system.
Global markets allow for after-hour trades to be conducted through electronic communication networks (ECN). As per Investopedia, an electronic communication network (ECN) is a computerized system that automatically matches buy and sell orders for securities in the market. It connects major brokerages and individual traders so they can trade directly between themselves without going through a middleman and make it possible for investors in different geographic locations to quickly and easily trade with each other.
Let’s conceptually try and map the meaning of after-hours trading. Assume a piece of news of the merger of two companies has come out after market hours.
An investor interested in purchasing the shares of the company may do so during after market hours. As mentioned in the earlier section, in most cases this is achieved through an ECN.
‘Spread’ is the difference that prevails between the sellers asking price and buyers bid price. Given that fewer investors participate in after-hour trading sessions, the spread may be much wider in comparison to normal trading sessions. This implies that the price of the stock sometimes comes at a premium and this is not an unusual characteristic for after-hour trading sessions.
The volume of the stock (number of shares of a company traded in a given period of time) during after-hours trading is expected to spike after the initial release of the news. It generally tends to thin down, however, by around 6 PM. It is useful to note that after-hours trading can be a significant risk proposition as it comes at a premium.
Taking into consideration the above 2 points, ie. volume being thin, and spread of the price of the stocks being wider than usual, implies directly that after-hour trading sessions can be riskier than normal trading sessions. In other words, liquidity and lack of participants make it a lot riskier. An example of when this can backfire is a typical case of some investors not choosing to participate in after-hours trading in spite of the news. This could mean that assuming they participate and react to the news the next day during market hours, there is a high possibility of the stock price to rise sharply. Should many big institutional investors participate in this manner it could result in misleading results or even heavy losses.
I hope this post answers for you what after-hours trading is and how it can prove to be riskier than regular trading sessions.
If you have any questions in the regard, please feel free to post them in the comments section below!