The prices of stocks are fluid and constantly changing. The price that you see at any point of the day is the last traded price of the stock/share. Stock exchanges facilitate trade in stocks by matching sellers with buyers and buyers with sellers. You may have noticed that stock prices change even when the market is closed. In this article, we will analyze why this phenomenon occurs.
The rise of after-hours trading (AHT) has had a significant impact on the stock prices even after the closing and opening bell. This is because the transactions are happening even after the closing bell is rung. This (AHT) moves stock prices when the market is closed.
How does after-hours trading (ATH) affect stock prices?
After-hour trading (ATH) occurs after regular market hours. Here the exchange matched potential buyers and sellers. ATH is more volatile and riskier as the trading volume and liquidity is much lower than during regular hours. The opening price of a stock may be quite different than its previous day’s close due to ATH. In the hours between the closing bell and the following trading day’s opening bell, a number of factors can affect the attractiveness of a particular stock.
- Company Announcements
News about a company often comes out while the market is closed, and this can shift what investors are willing to pay to own a share of the company. In fact, many companies wait until after the markets close before making any major announcements. For example, a positive earnings report may be issued, increasing a stock’s demand and raising the price from the previous day’s close. Conversely, bad news can negatively affect the price by creating less share demand. Without any trades taking place, investor sentiment can change the price of a stock.
- News Related to a Company
If the company reports an interest hike or if it acquires another company or breaks into a new market, it is considered to be in good financial health, resulting in a stock price hike. Similarly, a company that has to sell part of its stake, let go of employees or close down branches will experience financial struggle or a downturn in its earnings. Changes in government policy and important financial events such as the annual budget might also affect the prices of stocks in industries affected by these announcements/events.
In the past, the average investor could only trade shares during regular market hours; after-hours trading was reserved for institutional investors. However, today’s markets are more open than ever, and individuals are free to trade in the extended-hours sessions aided by the proliferation of the Internet and ECNs (Electronic Communication Networks). Investors before participating in the after-hour markets should be aware of the associated risks.