The Whole Picture

Wall Street Breakfast: Must-Know News

To Pilar:

Except for the relatively few items being traded on multiple markets, stocks don't really "move" after extended trading hours. It is simply a case of supply and demand. Let's say a stock ends the day at $10 per share. After trading stops, let's assume some very bad news is published about the company. The next morning, when trading begins, no one in their right mind would enter a bid for $10. The best bid might be for $5, so that the first trade of the day was $5. The stock did not move overnight from $10 to $5. You did not lose out on a chance to trade on the way down after the news was released. There were simply no buyers as the price dropped from $10 to $5.

After saying that, there are some private markets (i.e., those used by larger institutions) that may be in after-market trading, but I am not sure that is the case. Regardless, the same rules apply -- the price does not move around in a linear fashion -- it jumps around based on available buyers and sellers.

A good example of where this can hurt you is with a stop loss price. Let's say you own a stock trading at $10. You want to protect yourself from any major losses, so you put in a stop loss order for $8. However, some bad news is released such that all buyers reduce their bids to $5 or less. Unless your broker was kind enough to "guarantee" your stop loss order (highly unlikely), your stop loss would be forced to sell at $5 because there are no available buyers at $8. The price jumped from $10 to $5 instantly.

This is one of the reasons businesses make announcements after trading stops. It allows all shareholders and potential investors equal access to information, so that the share price can adjust appropriately and the market open at a fair price given the new information.