Late-Day Trading vs After-Hours Trading

Late-day trading and after-hours trading are often confused for one another. However, these are two completely different things that take place in the financial world. Here are the basics of late-day trading and after-hours trading and how they differ from one another.

Late-Day Trading

The process of late-day trading involves purchasing shares of a mutual fund after the close of the business day. When dealing with mutual funds, you are supposed to be able to purchase them at the end of the trading day. Therefore, or less of when your order goes in, it will not be processed until the end of the day. The net asset value of the mutual fund is calculated and this is the price that all investors get access to.

If someone is involved in late-day trading, it means that a mutual fund has allowed them to purchase shares after the close of the market at the net asset value that was calculated earlier. This gives them an unfair advantage over the rest of the market.

For example, let's say that a mutual fund's net asset value is calculated to be $7 per share. Then, some kind of important financial news was released about a particular company that the mutual fund has significant holdings in. At that point, your mutual fund company allows you to purchase shares of the mutual fund after the close of the market at $7 per share. The next day, when the market reopens, you know that the value of the shares will go up. Therefore, you are basically guaranteeing yourself profits through this strategy.

Using this strategy is illegal and should be avoided at all costs. If your mutual fund is allowing people to late trade, it is hurting the other investors in the fund. Most of the time, this practice is reserved for large institutional investors. Since the transaction costs of the fund are split equally between all of the investors, this basically means that small investors are subsidizing larger ones.

After-Hours Trading

After-hours trading involves the trading of individual stocks after the New York Stock Exchange closes. With this type of trading strategy, you are trading through online stock exchanges. This trading practices much more ethical and legal. When you trade individual stocks after-hours, stocks are being influenced by news announcements and other factors. Therefore, you are dealing with regular supply and demand when it comes to individual stocks.

Another thing to consider with after-hours trading is that every investor has an equal opportunity to buy and sell the stocks. As long as you have an online trading account, you will be able to gain access to stocks within the market. With late-day trading, you are gaining access to something that other investors cannot. This provides you with an unfair advantage in the market.

The process of after-hours trading is also more ethical because it does not hurt anyone else. When you get involved with late-day trading, you are essentially hurting the other investors in the fund by increasing their transaction costs.

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