Booyah Breakdown: After Hours

The biggest pitfall is the lack of liquidity. Liquidity is the textbook term for the ability to convert stock into cash. Obviously, you need buyers and sellers to get that done. Typically, fewer buyers and sellers equates to lower liquidity.

There are fewer people engaging in pre-market and after-hours trading, so liquidity tends to be lower, which means it may be harder to find someone who wants to buy your shares at the price you're trying to sell them.

Another big problem with trading in the early or after-hours markets is that spreads between bid and ask prices can be big, making it difficult to get the price you're looking for.

That's why, if you're going to play this game, you most definitely want to place a "limit order." With a limit order, you're instructing the ECN to buy or sell a specific number of shares at specified (or better) price. If your price doesn't come in, there's no sale.

Let's say you want to buy a stock at $15 per share. As luck would have it, Cramer gave the stock the "mon back" on his "Mad Money" show, and everyone dove into the after-market to buy it. But now the stock price has jumped to $20. Because you were smart and placed a limit order for $15 per share, however, the ECN didn't execute the trade for you and saved you from buying the stock at a puffed-up price.

If the stock doesn't fall back down to your price target, know that your order may never be executed. Nevertheless, this is a huge perk when you're trading in a low-volume or high-volatility arena.

A final risk to after-hours trading is that you are attempting to play with the pros. The day traders and large institutional investors -- like mutual funds and pensions -- tend to toil in the after-hours markets and are very astute at manipulating stock prices in them.

Which is exactly why pre-market and after-hours trading is generally no place for the novice or long-term investor. "If the long-term investor is buying on fundamentals, the reasons he decided to buy the stock should still be there in the morning during regular trading hours," says Adam Ritt, editor of the BetterInvesting Magazine.

The Joy of Risk

Maybe, but there's a reason people gamble - the sweet taste of the upside.

Having the ability to trade around the clock allows you to react quickly to breaking news stories or fresh information. So if a company releases its earnings numbers after the regular market closes (which happens often), you could get a jump on the stock in the after-hours market.

And while volatility is a clearly a risk, you may actually find some appealing prices during this time.

In addition, there's clearly a convenience factor. "Many folks trade online these days anyway, so if you want to place a trade before you go to work and make sure it's executed, the early market is useful," says Fred Ruffy, an analyst at Optionetics, an investor-education Web site.

Still, the best part about the early and after-hours markets is your ability to be a voyeur at the poker table. Watching the price changes in the after-hours market is a great barometer of how the regular market will react to the new information that was released after the regular trading day.

Granted, just because a stock is up 10% at 6:15 p.m. from its 4 p.m. closing price doesn't mean its going to start the next trading day that high. But you still may see it up 5% at the 9:30 a.m. open, and since you were watching the after-hours market, you know why.

So the early and after-market prices shouldn't be relied upon as accurate reflection of what a stock will trade at when the next regular session opens. Yet they will help you gauge market sentiment to some degree, just as the futures market does.

And let's face it, the ultimate goal is for people to trade at all hours, says Ruffy. So get used to it. Many U.S. companies already trade on overseas market while we're sleeping, so the trading doesn't really stop.

The casinos stay open all night long; maybe the stock markets should too.

What do you think?

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