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What Is After-Hours Trading?

 

As an investor, it’s helpful to understand how to trade during the after-hours market. When you make strategic decisions during this trading session, you have the potential to make substantial gains. Though after-hours trading is convenient, there are several risks and restrictions to consider. Use this guide to learn more about after-hours trading (sometimes called after trading hours) and how to participate in this extended-hours market session.

  • After-hours trading refers to the process of buying and selling stock or other securities after the regular stock market session has closed for the day.
  • Individual investors, high-net-worth investors, and institutional investors can participate in after-hours market trading.
  • The after-hours market session begins at 4 p.m. Eastern Standard Time (EST) and goes as late as 8 p.m. EST.
  • Though after-hours trading is convenient and offers different pricing opportunities, you face more competition from institutional investors and greater volatility compared to the regular market.

What Is After-Hours Trading?

Image via Unsplash by Murtaza Vora

After-hours trading is stock trading that occurs after the regular trading day of a stock exchange. Whereas the main trading session for most stock markets occurs during the day, after-hours trading refers to buying and selling securities when the major markets have closed.

Trades completed during this session are considered completed on that specific date. Though after-hours trading comes with several disadvantages, it allows investors to react quickly to breaking news and is more convenient overall.

How Does After-Hours Trading Work?

After-hours trading is done through electronic communication networks (ECNs). During after-hours trading, ECNs match prospective buyers and sellers without a traditional stock exchange. If your broker allows after-hours trading, they may have you sign an agreement to use the ECN. In addition, they may go over the risks you may face if you take part in this trading session.

When Does After-Hours Trading Start?

After-hours trading begins after the market closes during regular market hours. It starts at 4 p.m. EST — once the major U.S. stock exchanges close. It runs for around four hours, ending as late as 8 p.m. In contrast, the pre-market session runs from 4-9:30 a.m. EST, and the regular market session goes from 9:30 a.m. to 4 p.m. EST.

Who Can Trade After Hours?

Though after-hours trading has been around for a while, it used to only be used by high-net-worth investors and institutional investors. Thanks to ECNs, individual investors can now take part in after-hours trading. Whereas individual investors can interact electronically, large institutional investors can interact anonymously. Currently, several brokers offer after-hours trading, such as Fidelity and Charles Schwab.

Are There Rules for After-Hours Trading?

Since after-hours trading only takes place through ECNs, it’s important to follow any enforced rules and regulations. Every ECN and individual brokerage has its own set of rules you must abide by. If you want to participate in after-hours trading, consider a broker’s policies before proceeding. Some restrictions may force you to only trade during a specific set of hours, or you may only have unconditional limit orders.

How Does After-Hours Trading Affect Stock Prices?

With all three market sessions (pre-market, regular market, and after-hours market), shares are traded at an agreed-upon price. For example, the price you receive in the regular market is the same price someone else in the pre-market or after-hours market has agreed to pay.

Price changes in both the after-hours market and the regular market have the same effect on a security. In other words, if an after-hours market sees a $1 increase, the same growth occurs in the regular market.

When the regular market opens the next day, though, the stock may have a different opening price than it did during the after-hours market. Let’s say a stock’s price goes up during the after-hours market. If this happens, many investors may feel inclined to sell right away at the market open. During this scenario, the price of the stock may decrease from the previous day’s price during the after-hours market.

Though it’s helpful to show how the market reacts to breaking news after the regular market has closed, you shouldn’t rely on after-hours price changes to determine where a stock will trade during the next regular stock market session. This is because after-hours price changes are more volatile compared to regular market hours.

Benefits of After-Hours Market Trading

Trading during the after-hours market session comes with several advantages for investors. Here are some of the benefits that come with trading after the regular market closes:

  • Trading on new information: Trading after the regular session allows you to react immediately to breaking news rather than having to wait for the next day’s market to open. For example, if a company releases its earnings after the regular market closes, you have the opportunity to act on this news during the after-hours market session.
  • Acting on foreign market activity: Foreign markets have the potential to influence U.S. market prices. Since foreign market sessions take place outside of U.S. market hours, you can take advantage of opportunities during these instances.
  • Convenience: Instead of trading during regular market hours, you have the flexibility to trade during additional hours that may be more convenient for you.
  • Pricing opportunities: Despite the risk of volatility, there may be favorable prices you can take advantage of with after-hours trading.

Risks and Disadvantages of After-Hours Market Trading

Though after-hours trading opens up the opportunity for substantial gains, you can also encounter several risks and dangers. Once you understand these risks, it can be easier for you to determine if this market trading is something you still want to do.

Here are the risks of after-hours market trading for you to consider:

  • Lower trading volume and less liquidity: During the initial release of news, a stock’s volume may spike. However, it often thins out as the market session goes on. Because of this, there’s a significant risk when trading after-hours using illiquid stocks. This typically happens during after-hours trading since there aren’t many active traders during this session. Essentially, you may have less trading volume for your stock, and it may be harder to convert your shares to cash. However, if there’s breaking news of some sort, the volume may spike.
  • Wide spreads: When there’s a lower volume in trading, it may lead to a wide spread between the bid and ask prices. A wide spread refers to the price difference between what you buy a security for and what price you can sell it for. This can make it difficult for you to have your order executed at a desirable price.
  • More competition from institutional investors: As an individual investor, you have to compete against large institutional investors during after-hours trading. These institutional investors have more resources at their disposal than most individual investors do.
  • Greater volatility than the regular market: Since the after-hours market is more thinly traded compared to the regular market, you may face more substantial price fluctuations.
  • More delays: Though technology has the potential to affect any of the market sessions, there may be more lags and delays during an after-hours market session. If this happens, your trade may not go through as expected.
  • Extra fees: Depending on the stock, you may face additional fees as an after-hours trader.

Because of these risks, it’s important to use a limit order on any stock you buy or sell during after-hours trading.

How to Trade Stocks After Hours

If you’re interested in taking the plunge, follow these steps to trade stocks after hours:

  1. Prepare for after-hours trading. Review disclosure documents from your brokerage firm ahead of time. You should also go over their procedures for trading stock during the after-hours session. Since buying stock after hours is the same as buying it during the regular market session, it’s essential to review all of the fundamentals beforehand.
  2. Place the buy order. Make sure to specify the quantity and price when you do this.
  3. Monitor your order. Keep in mind that you may face delays when it comes to price quotes or order status.

If you’re interested in after-hours trading, don’t forget to consider the significant risks you may face. The more familiar you become with after-hours trading, the more you can use this market session to your advantage.