All investing involves risk, but the Securities and Exchange Commission (SEC) outlines the following eight risks that are specifically associated with trading in the after-hours and pre-market sessions:
1. Inability to see or act upon quotes: Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see which firms quotes you will be able to see and off of which quotes you will be able to trade.
2. Lack of liquidity: During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades.
3. Larger quote spreads: Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
4. Price volatility: For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours.
5. Uncertain prices: The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day. This means that even if a stock price rises in after-hours trading, it may fall right back down when regular trading opens again and the rest of the market gets to cast its vote on the price of the stock.
6. Bias toward limit orders: Many electronic trading systems currently accept only limit orders in the pre-market and after-hours sessions. Limit orders may cause you to miss out on having a trade filled.
7. Competition with professional traders: Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
8. Computer delays: As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades.