What is after-hours trading?
After-hours trading is the securities trading that happens after the major United States stock exchange closes at 4 p.m. ET. After-hours trading can run as late as 8 p.m.
How does after-hours trading work?
While after-hours trading can run as late as 8 p.m., trading volume usually thins out much earlier. After-hours trading is usually done through electronic communication networks (ECNs) that automatically match buy and sell orders.
Traders may prefer after-hours trading for several reasons:
- To participate in a market with fewer traders
- To accommodate their schedules
- To react to breaking news about some stocks after the stock market closes
After-hours trading is similar to premarket trading, which occurs before the market opens for the day. This usually happens between 7 a.m. and 9:25 a.m. ET. Both premarket and after-hours trading together are called extended-hours trading. The timing of the extended-hours trading varies based on the ECN or financial institution the trader uses. Stock exchanges also differ in the timings they post-trade data.
ECNs are programmed to match buy and sell orders automatically. But, if an order cannot be matched, it remains unfilled. Traders receive quotes based on the number of orders available on the ECNs being used. Traders may look for quotes on other ECNs, but there is no guarantee.
How does after-hours trading differ from regular market trading?
There are a few differences between trading during regular market hours versus after hours. They include:
Trading volume. Initially, traders may find that the trading volume (the total amount of stock or asset sold during the period of the trading day) increases, but that changes in the first few hours. After 6 p.m., there is a risk that traders may be trading stocks that are difficult to liquefy.
Cost. Stocks traded after hours can be pricey compared to stocks traded during regular market hours. The difference between the bidding price and the asking price (also called the spread) is higher.
Fewer investors. Fewer people trade after-hours. This makes trading risky, and hence, many traders prefer not to trade after hours even though there may be breaking news that could change the course of the stock market. Stocks may fall during after-hours and may come back to their earlier pricing at regular hours. Fewer shares can impact the price of the stock after hours. This is why there is a limit placed on the number and type of orders (25,000 shares maximum). Orders expire in the same trading session and they may be illiquid.
After-hours trading can cause changes in stock price for the next regular trading session, more so, if there was some new market information that investors took advantage of. Traders may also negotiate the price of a stock based on its supply and demand in the market, which could also affect the price of the stock during regular trading hours.
Advantages and disadvantages of after-hours trading
There are several advantages and disadvantages to after-hours trading. Here’s a summary.
Advantages
- Early access to new market information. Investors can take advantage of breaking news or other market developments that occur after the regular trading session.
- Convenience. Traders may find it more convenient to trade during after-hours hours, such as if they work during the day.
- Potential for greater profits. After-hours trading is often more volatile than regular trading, which can lead to greater profit opportunities.
Disadvantages
- Low liquidity. There are fewer traders active in the after-hours market, which can make it difficult to buy and sell securities.
- Wide spreads. The bid-ask spread (the difference between the highest price that buyers are willing to pay and the lowest price that sellers are willing to accept) is often wider in the after-hours market.
- Limited trading options. Some brokers may restrict after-hours trading to certain securities or types of orders.
