What Is After-Hours Trading?

After-hours trading is securities trading that starts at 4 p.m. U.S. Eastern Time after the major U.S. stock exchanges close. The after-hours trading session can run as late as 8 p.m., though volume typically thins out much earlier in the session. Trading in the after hours is conducted through electronic communication networks (ECNs).

Understanding After-Hours Trading

Traders and investors engage in after-hours trading for a variety of reasons. They may prefer trading with fewer market participants or their schedules may require it. They may want to take positions as a result of news that breaks after the close of the stock exchange. Or, they may want to close out a position before they leave on vacation.

Generally, after-hours trading refers to trading that takes place after normal market hours and up until about 8 pm. Premarket trading refers to trading that takes place before the start of normal market hours, generally from 7 a.m. until 9:25 a.m. Together, after-hours trading and premarket trading are referred to as extended-hours trading.

The precise times of extended-hours trading can depend on the ECN an investor uses or the financial institution where they place their orders. For instance, Wells Fargo allows after-hours trading from 4:05 p.m. ET until just 5 p.m.

Electronic markets (or ECNs) used in after-hours trading automatically attempt to match up buy and sell orders. If they can do so, trades are completed. If they can’t, trades remain unfilled.

After-hours trading typically only allows limit orders to buy, sell, or short, although a particular brokerage may be less restrictive. No stop, stop-limit, or orders with special instructions (such as fill or kill or all or none) are accepted. Moreover, orders are normally only good for the after-hours trading session in which they’re placed.

The maximum share amount per order is 25,000.

Quotes provided are limited to those available through the electronic market used. Investors may have access to other participating ECNs but it isn’t guaranteed.

Volume

In after-hours trading, the trading volume for a stock may spike on the initial release of news but most of the time thins out as the session progresses. The growth of volume generally slows significantly by 6 p.m. So, there is a substantial risk that investors will be trading illiquid stocks after-hours. 

Price

Not only does volume sometimes come at a premium in the after-hours trading sessions, so does price. It is not unusual for the spreads to be wide in the after-hours. The spread is the difference between the bid and the ask prices. Due to fewer shares trading, the spread may be significantly wider than during the normal trading session.

Participation

If liquidity and prices weren’t enough to make after-hours trading risky, the lack of participants may do the trick. That’s why certain investors and institutions may choose not to participate in after-hours trading, regardless of news or events.

It’s quite possible for a stock to fall sharply in the after hours only to rise once the regular trading session resumes the next day at 9:30 a.m. Many big institutional investors have a certain view of price action during after-hours trading sessions and express that view with their trades once the regular market re-opens.

Since volume is thin and spreads are wide in after-hours trading, it is much easier to push prices higher or lower. Fewer shares and trades are needed to make a substantial impact on a stock’s price. That’s why after-hours orders usually are restricted to limit orders. If your brokerage doesn’t restrict them, consider them anyway as a means to protect yourself from unexpected price swings and order fills.

Standard Trading vs. After-Hours Trading

What Are Accounts Payable (AP)?

Accounts payable (AP), or “payables,” refer to a company’s short-term obligations owed to its creditors or suppliers, which have not yet been paid. Payables appear on a company’s balance sheet as a current liability.

Another, less common usage of “AP,” refers to the business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Accounts payable can be compared with accounts receivable.

Understanding Accounts Payable (AP)

A company’s total accounts payable balance at a specific point in time will appear on its balance sheet under the current liabilities section. Accounts payable are obligations that must be paid off within a given period to avoid default. At the corporate level, AP refers to short-term payments due to suppliers. The payable is essentially a short-term IOU from one business to another business or entity. The other party would record the transaction as an increase to its accounts receivable in the same amount.

AP is an important figure in a company’s balance sheet. If AP increases over a prior period, that means the company is buying more goods or services on credit, rather than paying cash. If a company’s AP decreases, it means the company is paying on its prior period obligations at a faster rate than it is purchasing new items on credit. Accounts payable management is critical in managing a business’s cash flow.

When using the indirect method to prepare the cash flow statement, the net increase or decrease in AP from the prior period appears in the top section, the cash flow from operating activities. Management can use AP to manipulate the company’s cash flow to a certain extent. For example, if management wants to increase cash reserves for a certain period, they can extend the time the business takes to pay all outstanding accounts in AP.

However, this flexibility to pay later must be weighed against the ongoing relationships the company has with its vendors. It’s always good business practice to pay bills by their due dates.

Recording Accounts Payable

Proper double-entry bookkeeping requires that there must always be an offsetting debit and credit for all entries made into the general ledger. To record accounts payable, the accountant credits accounts payable when the bill or invoice is received. The debit offset for this entry generally goes to an expense account for the good or service that was purchased on credit. The debit could also be to an asset account if the item purchased was a capitalizable asset. When the bill is paid, the accountant debits accounts payable to decrease the liability balance. The offsetting credit is made to the cash account, which also decreases the cash balance.

For example, imagine a business gets a $500 invoice for office supplies. When the AP department receives the invoice, it records a $500 credit in accounts payable and a $500 debit to office supply expense. The $500 debit to office supply expense flows through to the income statement at this point, so the company has recorded the purchase transaction even though cash has not been paid out. This is in line with accrual accounting, where expenses are recognized when incurred rather than when cash changes hands. The company then pays the bill, and the accountant enters a $500 credit to the cash account and a debit for $500 to accounts payable.

A company may have many open payments due to vendors at any one time. All outstanding payments due to vendors are recorded in accounts payable. As a result, if anyone looks at the balance in accounts payable, they will see the total amount the business owes all of its vendors and short-term lenders. This total amount appears on the balance sheet. For example, if the business above also received an invoice for lawn care services in the amount of $50, the total of both entries in accounts payable would equal $550 prior to the company paying off those obligations.

Accounts Payable vs. Trade Payables

Although some people use the phrases “accounts payable” and “trade payables” interchangeably, the phrases refer to similar but slightly different situations. Trade payables constitute the money a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the inventory. Accounts payable include all of the company’s short-term obligations.

For example, if a restaurant owes money to a food or beverage company, those items are part of the inventory, and thus part of its trade payables. Meanwhile, obligations to other companies, such as the company that cleans the restaurant’s staff uniforms, fall into the accounts payable category. Both of these categories fall under the broader accounts payable category, and many companies combine both under the term accounts payable.

Accounts Payable vs. Accounts Receivable

Accounts receivable (AR) and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivable is the money that is owed to the company, typically by customers. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

The Bottom Line

Accounts payable (AP) refer to the obligations incurred by a company during its operations that remain due and must be paid in the short term. As such, AP is listed on the balance sheet as a current liability. Typical payables items include supplier invoices, legal fees, contractor payments, and so on.

What Is the Acid-Test Ratio?

The acid-test ratio, commonly known as the quick ratio, uses a firm’s balance sheet data as an indicator of whether it has sufficient short-term assets to cover its short-term liabilities.

Understanding the Acid-Test Ratio

In certain situations, analysts prefer to use the acid-test ratio rather than the current ratio (also known as the working capital ratio) because the acid-test method ignores assets such as inventory, which may be difficult to quickly liquidate. The acid test ratio is thus a more conservative metric.

Companies with an acid-test ratio of less than 1 do not have enough liquid assets to pay their current liabilities and should be treated with caution. If the acid-test ratio is much lower than the current ratio, it means that a company’s current assets are highly dependent on inventory.

This is not a bad sign in all cases, however, as some business models are inherently dependent on inventory. Retail stores, for example, may have very low acid-test ratios without necessarily being in danger. The acceptable range for an acid-test ratio will vary among different industries, and you’ll find that comparisons are most meaningful when analyzing peer companies in the same industry as each other.

For most industries, the acid-test ratio should exceed 1. On the other hand, a very high ratio is not always good. It could indicate that cash has accumulated and is idle, rather than being reinvested, returned to shareholders, or otherwise put to productive use.

Some tech companies generate massive cash flows and accordingly have acid-test ratios as high as 7 or 8. While this is certainly better than the alternative, these companies have drawn criticism from activist investors who would prefer that shareholders receive a portion of the profits.

Calculating the Acid-Test Ratio

The numerator of the acid-test ratio can be defined in various ways, but the main consideration should be gaining a realistic view of the company’s liquid assets. Cash and cash equivalents should definitely be included, as should short-term investments, such as marketable securities.

Accounts receivable are generally included, but this is not appropriate for every industry. In the construction industry, for example, accounts receivable may take much more time to recover than is standard practice in other industries, so including it could make a firm’s financial position seem much more secure than it is in reality.

The formula is:

$\begin{aligned} &\text{Acid Test} = \frac{ \text{Cash} + \text{Marketable Securities} + \text{A/R} }{ \text{Current Liabilities} } \\ &\textbf{where:} \\ &\text{A/R} = \text{Accounts receivable} \\ \end{aligned}$​Acid Test=Current LiabilitiesCash+Marketable Securities+A/R​where:A/R=Accounts receivable​

Another way to calculate the numerator is to take all current assets and subtract illiquid assets. Most importantly, inventory should be subtracted, keeping in mind that this will negatively skew the picture for retail businesses because of the amount of inventory they carry. Other elements that appear as assets on a balance sheet should be subtracted if they cannot be used to cover liabilities in the short term, such as advances to suppliers, prepayments, and deferred tax assets.

The ratio’s denominator should include all current liabilities, which are debts and obligations that are due within one year. It is important to note that time is not factored into the acid-test ratio. If a company’s accounts payable are nearly due but its receivables won’t come in for months, that company could be on much shakier ground than its ratio would indicate. The opposite can also be true.

Acid-Test Ratio Example

A company’s acid-test ratio can be calculated using its balance sheet. Below is an abbreviated version of Apple Inc.’s (AAPL) balance sheet as of Jan. 27, 2022, showing the components of the company’s current assets and current liabilities (all figures in millions of dollars):

What Are Accounts Receivable (AR)?

Accounts receivable (AR) are the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivable are listed on the balance sheet as a current asset. Any amount of money owed by customers for purchases made on credit is AR.

Understanding Accounts Receivable

Accounts receivable refer to the outstanding invoices that a company has or the money that clients owe the company. The phrase refers to accounts that a business has the right to receive because it has delivered a product or service. Accounts receivable, or receivables, represent a line of credit extended by a company and normally have terms that require payments due within a relatively short period. It typically ranges from a few days to a fiscal or calendar year.

Companies record accounts receivable as assets on their balance sheets because there is a legal obligation for the customer to pay the debt. They are considered a liquid asset, because they can be used as collateral to secure a loan to help meet short-term obligations. Receivables are part of a company’s working capital.

Furthermore, accounts receivable are current assets, meaning that the account balance is due from the debtor in one year or less. If a company has receivables, this means that it has made a sale on credit but has yet to collect the money from the purchaser. Essentially, the company has accepted a short-term IOU from its client.

Accounts Receivable vs. Accounts Payable

When a company owes debts to its suppliers or other parties, these are accounts payable. Accounts payable are the opposite of accounts receivable. To illustrate, imagine Company A cleans Company B’s carpets and sends a bill for the services. Company B owes them money, so it records the invoice in its accounts payable column. Company A is waiting to receive the money, so it records the bill in its accounts receivable column.

Benefits of Accounts Receivable

Accounts receivable are an important aspect of a business’s fundamental analysis. Accounts receivable are a current asset, so it measures a company’s liquidity or ability to cover short-term obligations without additional cash flows. 

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as accounts receivable turnover ratio, which measures the number of times a company has collected on its accounts receivable balance during an accounting period. Further analysis would include assessing days sales outstanding (DSO), the average number of days that it takes to collect payment after a sale has been made.

Example of Accounts Receivable

An example of accounts receivable includes an electric company that bills its clients after the clients received the electricity. The electric company records an account receivable for unpaid invoices as it waits for its customers to pay their bills. 

Most companies operate by allowing a portion of their sales to be on credit. Sometimes, businesses offer this credit to frequent or special customers that receive periodic invoices. The practice allows customers to avoid the hassle of physically making payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay after receiving the service.