After-hours trading is a mixed bag

After the closing bell clanged on the floor of the New York Stock Exchange, Intel announced that its fourth-quarter earnings set a record. Within minutes, the shares started to climb from their closing price of about $91 on electric trading networks.

Price, co-manager of Dresdner RCM Global Technology Fund, snapped up 21,000 shares at about $100 each.

But being able to buy the shares late in the evening was a mixed blessing. When the markets opened the following morning, Intel dipped to $98.50. He purchased additional shares and his investment did turn profitable later that day when Intel shares closed at $103.06.

Price's experience typifies the after-hours market. Long the exclusive domain of large institutional investors, individuals recently gained access to it--only to find that trading stocks late in the day isn't necessarily a shortcut to profits. In addition, the after-hours market is an unreliable indicator of where a stock will trade the following day.

Still, late trading can be a useful tool in the hands of a savvy investor. Movement in Qualcomm's stock recently showed how some investors can beat the rest of the pack when a stock is getting pounded.

Qualcomm shares fell about $15 to $133 in after-hours trading last month when it noted its current quarter may see a slowing in phone and chip sales. The following day the shares slipped even further, closing at $124.63.

In contrast, a pop in Amazon's after-hours trading last week turned out to be a significant understatement. Amazon released earnings Wednesday that contained some positive news for investors. The shares gained about $6 in after-hours trading, reaching $75. But the following morning they really caught fire, ending the day at $84.19.

"After-hours trading is a good indicator of which direction the stock may take the next morning, but it doesn't give a good indication of the magnitude of where it will be," said Ed Keon, director of quantitative research for Prudential Securities.

Investors also need to consider the information that is driving the stock, said Fred Hughes, a managing director for Robertson Stephens.

"Usually, you don't have a lot of information or news during after-hours trading...so, the price may (move in a) completely different direction the next morning," Hughes said.

For example, analysts' research reports may not be available until the morning, before the markets open. As a result, investors' attitudes about a stock can shift rapidly.

That's why portfolio manager Price generally waits until the afternoon to sell a stock.

"A stock may trade lower in the first few trades the next day, but as people talk to analysts and read more about the news, it usually rebounds for a few hours in the afternoon," Price said.

"If we sell a stock because of problems, we find the best time is about four hours after the open, rather than in after-hours or at the open."

Another key consideration investors should note before relying on after-market performance is volume, said Doug Baird, co-head of U.S. equity capital markets for Deutsche Banc Alex Brown.

"After-hours trading has little liquidity, so the prices you see offer little information of how the stock will perform the next day," Baird said.

For example, a stock trading around $50 with volume of 3 million shares has a more reliable price than a stock trading around $100 with volume of only 300,000 shares, Baird added.

The liquidity issue has improved in recent months. In October, the Nasdaq began allowing various after-hours trading systems to link up--effectively creating one large marketplace rather than several small ones. Previously, buy orders placed on Instinet or Island ECN, for example, could only be matched with sell orders within that particular system.

While an improvement, institutional investors such as Price would like even more liquidity.

"We tend not to use after-hours trading because of its ill-liquidity. It's useful if you're looking to trade $1 million in stock, but it's less useful if you're trying to move $10 million," he said.

For instance, Price was able to buy $2 million of Intel shares in after-hours trading, but had to wait until the market's open to pick up another $8 million worth of shares.

Today, the Nasdaq will address another issue when it institutes some changes in the way market makers do their jobs.

Market makers try to match offers to buy shares at a set price, or bids, with offers to sell shares at a specific price. The new program should help narrow the gap between bid and ask prices, potentially enticing more investors to participate in late trading.

While some institutional investors may be hesitant to dabble in after-hours trades, individual investors have demanded, and received, more access.

Datek Online was the first to offer the service last July and now reports that 8.6 percent of its daily trades are conducted after regular hours, said spokesman Mike Dunn.

In addition, 40 percent of Datek's funded accounts are configured to handle after-market trades. Each time a big news event breaks late in the day, new users are drawn to the service, Dunn noted.