What Is After-Hours Trading?

After-hours trading 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

It refers to trading that occurs after the market closes. It allows investors to buy and sell securities outside of regular trading hours. Trades in the after-hours session are completed through electronic communication networks (ECNs) that match potential buyers and sellers without using a traditional stock exchange.https://youtu.be/EtJOb17vXqA?t=4

KEY TAKEAWAYS

  • After-hours trading occurs after regular market hours.
  • Electronic communication networks (ECNs) match potential buyers and sellers rather than traditional markets. 
  • After-hours trading is more volatile and riskier than trading during the exchange’s regular hours because of fewer participants; as a result, trading volumes and liquidity may be lower than during regular hours.
  • Due to after-hours volatility, the opening price for a stock on the following day may be quite different from the price at which it closed the previous day.

After-Hours Trading: What It Is and How It Works

What is after-hours trading?

After-hours trading takes place after the trading day for a stock exchange, and it allows you to buy or sell stocks outside of normal trading hours. Typical after-hours trading hours in the U.S. are between 4 p.m. and 8 p.m. ET.

Trading outside of normal hours used to be limited to institutional investors and high-net-worth individuals. Still, technology has made it possible for the average investor to place orders for after-hour execution.

After-hours trading allows investors to react to company earnings releases and other news that typically occurs before or after normal trading hours. Prices can swing wildly on an earnings release or news that a CEO is stepping down. If you want to buy or sell as soon as possible based on the news, you’ll need to place an order for after-hours trading.

How after-hours trading works

after hours trading

After-hours trading is different from regular trading on the exchanges throughout the day. Instead of placing your order on the exchange, your order goes to an electronic communication network or ECN. That presents some limitations and additional risks compared to regular trading on the Nasdaq or the New York Stock Exchange.

Most notably, investors can only use limited orders to buy or sell shares. The ECN matches orders based on limited prices. Additionally, after-hours orders are only good for that session. You’ll have to put in another order when trading opens the next day if you’re still interested in the stock.

To execute an after-hours trade, you log in to your brokerage account and select the stock you want to buy. You then place a limit order similar to placing a limit order during a normal trading session. Your broker may charge extra fees for after-hours trading, but many don’t so be sure to check.

Your broker then sends your order to the ECN it uses for after-hours trading. The ECN attempts to match your order to a corresponding buy or sell order on the network. So if you put to buy 100 shares of XYZ for $50 each, the ECN will look for an order to sell at least 100 shares for $50. The trade is executed if it can match your order, and settlement times are the same as during regular sessions.

Risks of after-hours trading

After-hours trading comes with several risks not associated with trading on an exchange during regular trading sessions.

·        Pricing risk: Different financial institutions use multiple ECNs to execute after-hours trades, but you’ll only get access to one of them through your broker. You’ll get the best available price from multiple venues during a normal trading session. But after-hours sessions limit your price discovery to just one network.

·        Liquidity risk: Not only are you limited to the ECN your broker uses but there are also fewer market participants in after-hours sessions. As a result, there’s limited liquidity for most stocks. That creates wider bid-ask spreads and an increased risk that your order won’t get executed.

·        Volatility: When everyone’s trying to react to a news item all at once, a stock will trade wildly in the after-hours session as the market works to digest the news and discover a new price for the security. That can make it difficult for an average investor to judge whether or not their limit order will have a good chance of execution. Moreover, you may be able to get a better price in the regular trading session the next day. 

The bottom line is that after-hours trading is possible and can help you react to earnings reports and other news outside of normal market hours. However, each brokerage is a little different, so do your homework before getting started.

Stock pricing differences during extended-hours trading

will generally have less liquidity, more volatility, and lower volume.2 This can substantially impact the price that a buyer or seller ends up receiving for their shares, so it is standard practice to use a limit order on any shares bought or sold outside normal trading hours.

Typically, price changes in the after-hours market have the same effect on a stock that changes in the stock market does: A $1 increase in the after-hours market is the same as a $1 increase in the stock market. Therefore, if you have a stock that falls from $10 (your purchase price) to $9 during the regular day’s trading session but then rises by $1.50 to trade at $10.50 in the after-hours market, you will have experienced a $1 loss during the day’s session (from $10 to $9). Still, because prices rose $1.50 in after-hours trading, you would be sitting on a $0.50-per-share gain.

However, when the stock market opens for the next day’s trading (when most individual investors will have the opportunity to buy or sell), the stock may not necessarily open at the same price it traded in the after-hours market.

For example, if a company releases a solid quarterly earnings report after market close, its stock price may increase in the after-hours market. But when institutional and retail investors have parsed through the details of the earnings report, they may discover that the company’s performance was not as impressive as it first appeared. As a result, sell orders may outnumber buy orders at market open, and this selling pressure may cause the stock to open at a price well below the level at which it traded in the previous day’s close or its after-hours market.

The price changes seen in the after-hours market are useful for showing how the market reacts to new information released after the stock market has closed. However, after-hours price changes are more volatile than regular-hours prices, so they should not be relied on to accurately reflect where a stock will trade when the next regular session opens.

ECNs VS after-hours trading

In the past, the average investor could only trade shares during regular market hours; after-hours trading was reserved for institutional investors. However, today’s markets are more open than ever, and individuals are free to trade in the extended-hours sessions aided by the proliferation of the Internet and ECNs. This has been a step toward a situation in which stock traders can make trades 24 hours per day. In 2018, TD Ameritrade adapted its platform to allow for 24-hour trading of certain exchange-traded funds (ETFs), another step in this direction.3

Investors can only place limit orders (and not market orders) to buy or sell shares in the after-hours market. The ECN then matches these orders based on the prices set in the limit orders. Limit orders reduce the risk of getting “filled” at an undesirable price, which is an important consideration in the after-hours market due to lower trading volumes and relatively wide bid-ask spreads. The flip side is that investors may not get their orders executed if the stock does not trade at a price specified in the limit order.

When Can I Trade in the After-Hours Market?

After-hours trading is available from 4 to 8 p.m. ET. Pre-market trading is available from 4 to 9:30 a.m. ET.2

After-hours trading is available from 4 to 8 p.m. ET. Pre-market trading is available from 4 to 9:30 a.m. ET.2

You would trade just like you would during regular hours by logging into your brokerage account and selecting the stock you wish to trade. The only difference is that you will have to use a limit order to buy or sell the stock rather than the kind of market order that you might place during regular trading. Be mindful that bid-ask spreads may be wider than during regular trading hours, and stock price moves can also be more volatile.

Why Would an Investor or Trader Want to Trade in the After-Hours Market?

Numerous companies release quarterly earnings reports after market close. Occasionally, market-moving news also hits the news wires after regular trading hours. The ability to react to these developments outside of regular hours is invaluable for investors and traders, especially if they want to exit a long or short position. A trader with a long position, for instance, may be willing to accept a less-than-ideal price in the after-hours market to close it out at a loss rather than take the risk of leaving the position overnight and incurring larger losses the next day.

Why Are Stock Prices More Volatile in After-Hours Trading?

The number of participants in after-hours trading is a fraction of those during regular market hours. Fewer participants mean lower trading volumes and liquidity, and hence, wider bid-ask spreads and more volatility.

If My After-Hours Order Is Not Filled, Will It Carry Over to the Next Day’s Trading?

After-hours orders are only good for that session, so if your limit order has not been executed, it will be cancelled, and you will have to put in a new order for the next day’s regular trading session.

The Bottom Line

Participating in after-hours markets can benefit investors and traders, but the risks are significant. Anyone participating in after-hours market activity should be mindful of these risks.

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