The highest volume market centers today have traditionally been open for business from 9:30 AM to 4:00 PM EST. Although trading outside that window - or “after-hours” trading - has occurred for some time, it has been mostly limited to high net-worth investors and institutional investors.
But this is changing. Some smaller exchanges have recently extended their hours. And, with the rise of electronic communications networks, or ECNs, everyday individual investors can now trade in the after-hours markets.
Be aware that after-hours trading for the individual investor is in its infancy and changes are taking place rapidly. Before you decide to trade after-hours, you need to educate yourself about the differences between regular and extended trading hours, especially the risks. You should consult your broker and read any disclosure documents on this new and developing area. Check your broker's Website for available information on trading after-hours. As with trading during regular hours, the services offered by brokers during extended hours vary. You should therefore shop around to find the firm that best suits your trading needs.
While after-hours trading presents investing opportunities, there are also the following risks for those who want to participate:
The price of some stocks, especially recent “hot” IPOs and high tech stocks can soar and drop suddenly. In these fast markets, when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmation slow down while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly.
Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast-moving markets.
You can limit your losses in fast-moving markets if you:
With a click of mouse, you can buy and sell stocks from more than 100 online brokers offering executions as low as $5 per transaction. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a trade in a nanosecond, but making wise investment decisions takes time. Before you trade, know why you are buying or selling and the risk of your investment.
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a “hot” IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses as the stock drops later in the day or the weeks ahead.
Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But, by using a limit order, you also protect yourself from buying the stock at too high a price.
Investors may find that technological “choke points” can slow or prevent their orders from reaching an online firm. For example, problems can occur where:
Most online trading firms offer alternatives for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way - talking to a broker over the phone. Make sure you know whether using these different options may increase your costs. And remember, if you experience delays getting online, you may experience similar delays when you turn to one of these alternatives.
Some investors have mistakenly assumed that their orders have not been executed and place another order. They end up either owning twice as much stock as they could afford or wanted, or with sell orders, selling stock they do not own. Talk with your firm about how you should handle a situation where you are unsure if your original order was executed.
When you cancel an online trade, it is important to make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume that it means the trade was canceled. Orders can only be canceled if they have not been executed. Ask your firm about how you should check to see if a cancellation order actually worked.
In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are free riding, which violates the credit extension provisions of the Federal Reserve Board. If you free ride, your broker must “freeze” your account for 90 days. You can still trade during the freeze, but you must fully pay for any purchase on the date you trade while the freeze is in effect.
You can avoid the freeze if you fully pay for the stock within five days from the date of the purchase with funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.
Now is the time to reread your margin agreement and pay attention to the fine print. If your account has fallen below the firm's maintenance margin requirement, your broker has the legal right to sell your securities at any time without consulting you first.
A convertible security is a security; usually a bond or a preferred stock that can be converted into different security; typically shares of the company’s common stock. In most cases, the holder of the convertible determines whether and when a conversion occurs. In other cases, the company may retain the right to determine when the conversion occurs.
Companies generally issue convertible securities to raise money. Companies that have access to conventional means of raising capital (such as public offerings and bank financings) might offer convertible securities for particular business reasons. Companies that may be unable to tap conventional sources of funding sometimes offer convertible securities as a way to raise money more quickly. In a conventional convertible security financing, the conversion formula is generally fixed – meaning that the convertible security converts into common stock based on a fixed price. The convertible security financing arrangements might also include caps or other provisions to limit dilution (the reduction in earnings per share and proportional ownership that occurs when, for example, holders of convertible securities convert those securities into common stock).
By contrast, in less conventional convertible security financings, the conversion ratio may be based on fluctuating market prices to determine the number of shares of common stock to be issued on conversion. A market price based conversion formula protects the holders of the convertibles against price declines while subjecting both the company and the holders of its common stock to certain risks. Because a market price based conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both the company and its shareholders, convertible security financings with market price based conversion ratios have colloquially been called "floorless", "toxic," "death spiral," and "ratchet" convertibles.
Both investors and companies should understand that market price based convertible security deals can affect the company and possibly lower the value of its securities. Here's how these deals tend to work and the risks they pose:
Before you decide to invest in a company, you should find out what types of financings the company has engaged in – including convertible security deals – and make sure that you understand the effects those financings might have on the company and the value of its securities. You can do this by researching the company in our database and looking at the company's registration statements and other filings. Even if the company sells convertible securities in a private, unregistered transaction (or "private placement"), the company and the purchaser normally agree that the company will register the underlying common stock for the purchaser's resale prior to conversion. You'll also find disclosures about these and other financings in the company's annual and quarterly reports and in any interim reports that announce the financing transaction.
If the company has engaged in convertible security financings, be sure to ascertain the nature of the convertible financing arrangement – fixed versus market price based conversion ratios. Be sure you fully understand the terms of the convertible security financing arrangement, including the circumstances of its issuance and how the conversion formula works. You should also understand the risks and the possible effects on the company and its outstanding securities arising from the below market price conversions and potentially significant additional share issuances and sales, including dilution to shareholders. You should be aware of the risks arising from the effects of the purchasers and other parties trading strategies, such as short selling activities, on the market price for the company's securities, which may affect the amount of shares issued on future conversions.
Companies should also understand the terms and risks of convertible security arrangements so that they can appropriately evaluate the issues that arise. Companies entering into these types of convertible securities transactions should understand fully the effects that the market price based conversion ratio may have on the company and the market for its securities. Companies should also consider the effect that significant share issuances and below market conversions have on a company's ability to obtain other financing.