Facebook reported some garish earnings guidance after the market closed today and the reaction was pretty big. In fact, it was so big, that news outlets and other investment analysts started publishing stories about how far down Facebook stock was trading “after hours.”
When this happens, people have questions, mostly, What is After Hours Trading.
After Hours Markets
Although it never really matters to most people, the reality is that isn’t just one stock market. There are actually several different exchanges. A couple of decades ago, accessing these other exchanges wasn’t really the kind of thing that your average trader had much ability to do. Of course, times change.
These days, with the advent of electronic trading, and online brokerages, it’s actually pretty easy to access the other exchanges, even if you don’t know you are doing it.
After the standard trading markets — NYSE, NASDAQ, and AMEX – close at 4:00 PM Eastern, those other markets fire up offering After Hours Trading, sometimes referred to as Extended Hours trading. Most major brokerages offer their clients the ability to access those extra trading hours, although you usually have to sign some forms saying that you understand the risks.
Basically, the way it works is that a stock, like Facebook has a final trade right around 4:00 PM ET. The price that this last trade gets executed at becomes the closing price. If someone asks what Facebook was “at” on a certain day, most people will reply with the closing price. Look at a standard stock quote, and the price is frozen at the closing price, until the following morning.
However, at 4:01, Facebook could trade again, on an after hours exchange.
On your average day, the after hours trading markets are usually just a continuation of the previous trading day, or in the case of pre-market trading, a preview of what the market open will look like. So, if FB closes at $200.00, then the trade at 4:01 will be right around that price, maybe $200.05, or something.
On days like today, when a company reports big news, or on days where a big finance news item comes out, things get a little livelier.
So, today, traders are using after-hours trading to sell Facebook stock. Since Facebook is a big stock, and a well known household name, there is more interest than normal. Couple this with the fact that the stock is down big (over 20% while I’m writing this), and people get interested.
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Trading After Hours
Generally speaking, trading after hours is not this dramatic. While many stocks have a price change between the previous day’s close and the following day’s open, it’s often just a few cents for less volatile companies, and usually just a dollar or two for a high-priced, high-volatility stock like Facebook.
So, what happens now?
After hours markets are notoriously thin, that means there are way fewer traders than during the market open. That means that it can be easier for a small group of panicked investors to move a stock price. That being said, the company’s earnings call was pretty bad, and the price will open much lower tomorrow. How much lower, and how that will compare to the price during after hours trading will depend a lot upon whether the sentiment tomorrow is that cooler heads will prevail, or it’s only going down from here.
Either way, before you run out and fire up your after hours trading menu, remember the stock price is already down 20%. You missed the big move. Make sure whatever trades you make, you are thinking about what happens NEXT, now what already happened.