What is Overnight Trading? Everything You Need to Know

You have probably felt this as an investor: you go to sleep after a perfectly normal market day and wake up to a red Monday.

The US markets may have crashed overnight. Oil prices spiked. A big company posted earnings at 2 AM. Or some global event suddenly shook investor sentiment. And just like that, the stocks you were tracking (or already holding) are no longer where you left them.

News breaks 24/7. Global markets react instantly. But retail traders in India (and many other markets) can only respond during market hours (usually). By the time the market opens, prices may have already jumped or crashed, leaving you with limited control and late entries.

This is exactly where overnight trading may come to your rescue. This guide will break down everything you need to know about overnight trading in the stock market.

How Overnight Trading Works?

So, what is overnight trading? It is exactly as the name suggests: a way to place buy or sell orders outside of market hours.

Most brokers provide After Market Orders (AMOs), which allow you to place orders after standard market hours (executed when the market opens the next day).

Some brokers may even allow extended hours for specific markets (like US stocks) or products (F&O).

Benefits of Overnight Trading

You may be wondering, “Why overnight trading?” You can just place your orders during the active market session. But there are certain benefits to overnight trading that you may have overlooked.

1. Flexibility: Using overnight trading, you can place trades whenever you want. This way, foreigners and NRIs interested in trading in India and Indians unable to track markets during active trading hours can place their orders before the exchanges open.

2. Investment strategy: React to news immediately rather than waiting for the market to open. There is always something happening in the global markets that may affect your trading decisions. With overnight trading, you can react quickly and give your portfolio an advantage.

3. Informed decision-making: The stock market fluctuates every second. Placing AMOs can free you from the pressure of real-time fluctuations and give you time to analyse the situation (or the company). This way, you can avoid impulsive trading.

Risks of Overnight Trading

Overnight trading may seem like the perfect way to gain a first-mover advantage. But it has risks that you cannot ignore. Here are some risks you should keep in mind when overnight trading:

1. No real-time control: After placing an overnight trade order, you can only modify it before your broker sends it to the exchange for the pre-market session. You cannot respond to surprise updates or sudden sentiment shifts.

2. Unpredictability: Overnight trading is most influenced by global news, and it can be harder to predict how it may affect Indian markets.

3. Price gaps: A lot can happen when you are asleep. A stock that looks stable at 5 PM may open the next morning with a big gap up or down. This makes overnight positions riskier.

Make sure that before you make AMOs. You fully understand that the benefits come with risks. That is a crucial part of knowing and understanding what is overnight trading.

Strategies for Overnight Trading

There are ways that you can use to help reduce the risks of overnight trading. Here are some strategies:

Long-Term Swing Trades

Placing a long-term swing trade basically means that you hold the position for a longer time. This way, you do not depend on getting the perfect price on the next day’s market open. Even if the stock gaps up or down overnight due to news, you are more likely to ignore that short-term shock and stay focused on the bigger move.

Hedging Using Futures and Options

Using Futures and Options (F&O) as a hedge for your overnight trades may help protect your trade from any sudden price gaps.

• If you are holding a stock and fear it may fall, you can use futures or put options so that if the stock drops, your hedge helps cover the loss.

• If you fear prices may rise before you buy, you can use futures or call options to lock in a safer level.

Using the Stop Loss and Risk Management Tool

In overnight trades, prices can jump suddenly due to news, and liquidity is lower after-hours. Using a stop loss, you can set a price limit in advance. If the stock falls to your stop loss level, your broker will automatically exit your position. A stop loss can help prevent a small loss from turning into a huge one.

You do not have to depend only on stop loss. There are a few other risk management tools that can help you stay safer in overnight trading.

For example, you can use diversification to spread your money across different stocks, so if one trade goes wrong, it does not mess up everything.

Also, consider using limit orders. Instead of buying or selling at whatever price the market gives you, you set the price you are comfortable with. That way, you do not end up getting a bad deal when prices jump at market opening.

These small steps can really help you control losses in overnight trades.

Margin and Leverage in Overnight Trading

In overnight trading, margin simply means the extra money your broker asks you to keep as safety because prices can change suddenly overnight.

And leverage means that you are trading with borrowed money. Hence, you can buy more shares than you can actually afford. This can help you earn more if the stock goes up, but if the stock falls overnight, you can lose money faster and more.

That is why you should understand margin and leverage before holding a trade overnight.

Risks of Higher Leverage

Leverage can feel like a shortcut in trading because it lets you take bigger trades with less money. But, high leverage has many risks:

• With leverage, even a small price drop can turn into a big loss for you.
  
• If your trade starts going badly, your broker may ask you to add more money quickly to keep it running.
  
• If you do not add funds, the broker may close your position automatically, usually at a loss.
  
• A few wrong trades with high leverage can wipe out your trading money much faster than normal.
  
• Bigger trades often mean you pay more in charges like spreads, brokerage, and overnight fees.
  

How Brokers Charge for Overnight Positions

Brokers usually do not charge anything extra just because you are holding a trade overnight. In most cases, you will only have to pay the normal brokerage. Brokers typically charge in a few common ways.

• Percentage-based brokerage, where they take a small percentage of your trade.
  
• Flat brokerage, like ₹20 per executed order. Charges may vary for different brokers.
  

Apart from brokerage, you will also pay regulatory charges like STT, SEBI fees, exchange transaction charges, and stamp duty. On top of that, 18% GST is applied on brokerage and other fees.

Note: Confirm brokerage for overnight trading with your broker before making any decisions.

Conclusion

Overnight trading is a convenient option. It lets you place your orders even after the market closes, so you do not have to rush or sit in front of the screen all day. But at the same time, overnight trades can be a little unpredictable because anything can happen (news, global market movement, sudden gaps at opening, etc.).

So, it is always better to trade smart: keep your risk under control, avoid going heavy on leverage, and always have a clear plan before you hold a position overnight.

Sources:

NASDAQ
Investopedia