After-hours stock trading: What is it, and should you care?

BONDY ON MONEY

May 22, 1994|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

Q: I have been following the market for three decades -- through the doldrums, the glory years and the current floppy scenario.

My question is: Last year, I purchased Motorola stock as a long-term investment. This year, on Tuesday, April 12, the stock dropped $12. A newspaper article stated that $7.75 of the decline occurred in "after-hours trading" on Monday. What in the world is "after-hours trading"?

A: After-hours trading is a catchall phrase encompassing many different ways to sell stocks after 4 p.m. Eastern time, when the major exchanges close. A few after-hours trading avenues include:

* Third markets: These markets allow investors to execute "off-board" trades, trades not taking place on the New York Stock Exchange or the American Stock Exchange. Off-board tTC markets are mostly electronic services that match buyers and sellers. The largest of these systems are Instinet, Posit and Wunsch Auction System, which are exclusively used by institutional traders.

* Foreign exchanges: Exchanges around the world, which operate in vastly different time zones, trade U.S. securities much as our exchanges list some foreign stocks as well as American Depository Receipts (ADR) of foreign stocks. (ADRs are certificates representing a certain number of shares in a corporation in another country.)

* The New York Stock Exchange's after-hours trading: This exchange allows its members to continue to trade for one hour after 4 p.m. but only at the closing price. By definition, this particular service cannot affect the price of the stock.

* Pacific Stock Exchange: The PSE, whose stocks include Motorola, remains open until 4:50 p.m. Eastern time. Most likely, the major price drop of Motorola occurred there, especially if negative news was announced shortly after 4 p.m. Eastern time April 11.

Stock markets are highly efficient, especially with large companies that are followed by many security analysts and held in institutional portfolios, as is the case with Motorola. This means that at any moment, all available public information (as opposed to insider information, whose use is illegal in trading) is reflected in the current market price.

As a result, the main cause of price gaps is unexpected news. In fact, on April 11 at 4:30 p.m. Eastern time, a news story detailed Motorola's first-quarter earnings. Although the number was good, it fell short of analysts' expectations. This created a stampede in the after-hours market by a number of large holders, which in turn led to the $7.75 price drop.

At 6 a.m. April 12, before the market opening, additional news came out, which increased the gap by another $4.25, resulting in the actual opening at a full $12 below the April 11 4 p.m. close.

But every time a stock is sold by someone who thinks it will go down further, it is bought by someone else who believes it will go up. And one will be right, and the other will be wrong. Only time will tell.

Q: A bank is offering a five-year certificate of deposit with two free "bump-ups." These bump-up provisions allow the depositor to lock in higher rates twice over the life of the CD. This sounds too good to be true. What am I missing?

A: You haven't missed a thing. This is a fairly new twist, though.

Some banks, realizing that today's low rates may scare off long-time CD depositors, have added these new provisions to placate investors' fears of increasing interest rates.

Although most banks still only levy small penalties for early withdrawal (three months' to six months' interest on a five- to 10-year CD), the bump-up provision allows you to lock in a higher rate (if interest rates go up) at no cost at all.

Susan Bondy welcomes readers' questions, but the volume of mail prevents her from answering each letter personally. Write to her in care of this newspaper. All letters will be treated confidentially.

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