Back in my younger days, after the bars and nightclubs closed, I used to continue the party at "after hours" clubs, bars that stayed open later than they were supposed to where the liquor seemed harder, the clientele seedier, and the action wilder. While I've given up those ways, in many respects I can still find those same straits in the after hours trading activities of the stock market.
As investors we're all familiar with the stock exchanges opening at 9:30 a.m. and closing at 4:00 p.m. Yet both before the market opens and for a while after it closes, you can still buy and sell shares of stock. This after hours trading has all the hallmarks of the freewheeling establishments I used to frequent.
An intoxicating elixir
While there once was talk of allowing trading 24 hours a day, we haven't heard much about that since the bubble burst in 2000. Still, brokerage houses have expanded trading time to basically cover our waking hours. TD Ameritrade (NASDAQ:AMTD) and E*Trade (NYSE:ET) allow investors to buy and sell stock from 8:00 a.m. to 8:00 p.m., while Fidelity and Charles Schwab (NASDAQ:SCHW) start as early as 7:30 a.m. There's a heady feeling you can get trading after hours. There are not many people around and your transactions have a profound effect on a share's price.
It wasn't until 1999 that after hours trading was even available to individual investors. Only institutional investors had access to this service, but clamoring individuals finally persuaded the SEC to allow everyone access. But as with many areas of life, just because you can do something doesn't necessarily mean you should. Individuals who are trading after hours are generally investing on emotion. A company releases some bad news after hours and traders are there dumping their shares. Is it good news? Shares are jumping up.
Wild West action
For example, graphics processor manufacturer Nvidia (NASDAQ:NVDA) reported yesterday after the market's close that its audit committee had discovered problems with options backdating. While the stock had closed down less than 1% during regular trading hours, the stock dropped 8.5% after hours when the company made the announcement. Similarly, ParluxFragrances (NASDAQ:PARL) fell by more than 32% yesterday on a poor sales report released after hours. Yet UTStarcom (NASDAQ:UTSI) jumped more than 13% as it narrowed its losses.
The problem with such trading is that the price movements tend to be overblown. A stock that falls dramatically after hours because of emotional reaction to the news, will often open the next day down only a little bit, or not at all. After hours trading is very illiquid. There are few shares available for trading and fewer buyers and sellers to match up. Those that do have a bigger impact than warranted. But once the markets open and the stock is trading freely, the overall impact of whatever news is minimized. Those who sold after hours find that they've realized far greater losses than what they would have had they simply waited for the market to open.
The truth is there are very few pronouncements made by companies that require us to actthisminute. Emotional investors will usually lose out in the long run as they buy and sell on gut feelings. Sure the company may have stumbled this quarter, but is the overall business sound? Is the company's business plan still intact and functioning? If so, there's no need to dump your shares immediately and certainly not after hours.
At The Motley Fool, we advocate that investors adopt a business owner mindset. You're not buying slips of paper called stock certificates, but rather pieces of a company, and you should buy into it with an eye for holding onto those shares for years and years. A single quarterly sales blip is no reason to bail out, and a calm, reasoned transaction can more easily be made during regular market hours.
You needn't jeopardize your health and well-being by frequenting outlaw speakeasies, and you don't have to endanger your financial interests by engaging in equally risky activities trading after hours.
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Charles Schwab and Nvidia are recommendations of Motley Fool Stock Advisor . A 30-day guest pass gives you admission during and after business hours and lets you see all the selections currently beating the market by 35 percentage points.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
