What Is After-Hours Trading?

After-hours trading refers to the buying and selling of securities that take place outside of regular stock exchange hours, typically from 4 p.m. to 8 p.m. Eastern Time.

This type of trading is typically conducted through electronic communication networks (ECNs) and typically sees less trading activity than during regular hours.

Individuals who trade securities may participate in after-hours trading for various reasons, such as to trade in a less crowded market, to react to news that became available after the close of the stock exchange, or to exit a position before going on vacation. It could also be because of their personal schedule.

After-hours trading is the buying and selling of securities that happens after the regular market hours, usually until 8pm. Premarket trading, on the other hand, is the trading that occurs before the start of the regular market hours, typically between 7am and 9:25am. Both of these types of trading are grouped together and referred as extended-hours trading.

The exact schedule for extended-hours trading may vary depending on the electronic communication network (ECN) or financial institution an investor uses. For example, Wells Fargo's after-hours trading hours run from 4:05 p.m. to 5 p.m. Eastern Time.

In after-hours trading, electronic communication networks (ECNs) automatically try to match buy and sell orders. If a match is found, the trade is executed, otherwise it remains unfulfilled.

During after-hours trading, most often only limit orders to buy, sell, or short are accepted. However, specific brokerages may have more relaxed rules. Orders such as stop, stop-limit, or orders with specific conditions (e.g. fill or kill, all or none) are not typically accepted. Additionally, orders placed during the after-hours trading session are generally only valid for that session.

The quotes available during after-hours trading are typically limited to those provided by the electronic communication network (ECN) in use. Investors may have access to other ECNs, but this is not guaranteed.

Volume

During after-hours trading, the trading volume of a stock may increase temporarily when news is first released, but usually decreases as the session continues. The volume decrease can be substantial by 6 pm. This means that there is a high risk of trading stocks with low liquidity during the after-hours.

Price

In after-hours trading, the volume of shares traded is often lower, and as a result, prices tend to be higher. The bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept, is often wider in the after-hours trading sessions than during the normal trading session. This is due to the lower trading volume.

Participation

After-hours trading can be risky due to factors such as low liquidity and fluctuating prices. Additionally, the limited number of participants in the market can also contribute to this risk. As a result, some investors and institutions may opt not to participate in after-hours trading, regardless of any news or events.

It is not uncommon for a stock to experience a significant decline during after-hours trading, only to rebound when the regular trading session begins the next day. This behavior is often influenced by the actions of large institutional investors, who may have a particular perspective on the market during after-hours trading and execute trades accordingly once the regular market opens.

Due to the low volume and wide bid-ask spreads in after-hours trading, it is relatively simple to significantly influence a stock's price. As a result, fewer shares and trades are required to make a meaningful impact. For this reason, many brokerages limit orders to limit orders during after-hours trading. Even if your brokerage doesn't impose such restrictions, it's advisable to use limit orders to guard against unexpected price fluctuations and order execution.

Standard Trading vs. After-Hours Trading

Standard Trading:

• Orders can be placed at any time and executed during the hours of 9:30 a.m. to 4 p.m. ET.
• Takes place on stock exchanges and Nasdaq through market makers and ECNs.
• There is no limit on order size.
• No restrictions on order types.
• Orders can be carried over to subsequent sessions.
• A wide variety of securities are traded, including stocks, options, bonds, mutual funds, and ETFs.
• High volume and liquidity result in executed trades.

After-Hours Trading:

• Orders can be placed and possibly executed after 4 p.m. through 8 p.m.
• Takes place via ECNs.
• 25,000 share maximum order size.
• Orders are normally restricted to limit orders.
• Orders normally expire in the same trading session they're placed.
• Most listed and Nasdaq securities are available, but due to lower liquidity, orders may not get filled.

What are the advantages of After-Hours Trading

After-hours trading, which allows for the placement and execution of trades outside of normal stock exchange hours, can be beneficial for certain traders and investors. It offers some advantages.

Opportunity

After-hours trading allows investors to respond to market-moving news and events that are released outside of regular trading hours, such as economic reports or earnings announcements. It also provides them with the chance to take positions based on unexpected events that may potentially impact prices.

For investors who focus on dividend-paying stocks, after-hours trading can be a valuable tool. It allows them to purchase a stock after the regular market hours on the day before the ex-dividend date, which they might have missed during the regular trading session. This gives the investor an opportunity to still be eligible for the dividend.

Convenience

Traders and investors might choose to engage in after-hours trading for various reasons, such as being busy during regular market hours but still wanting to trade, or it fitting into their strategy of opening or closing positions when there are fewer market participants.

Risks of After-Hours Trading

Before engaging in after-hours trading, it is crucial to be aware of the additional risks involved, beyond the standard risks associated with stock trading. Some brokerages may require investors to review the ECN user agreement and speak with a representative to fully understand and accept these risks.

When considering after-hours trading, it is essential to be aware of the potential risks, which include:

• Low liquidity: Due to low trading volume, it may be difficult to buy and sell stocks.
• Price uncertainty: The best available prices may not be visible or obtainable, as prices during after-hours trading are typically provided by a single ECN.
• Price volatility: Low liquidity can lead to volatile prices, making it challenging to fill orders.
• Wider bid-ask spreads: This may indicate an illiquid security and make it hard to buy or sell.
• Competition: Professional traders are more active in after-hours trading, which can cause volatility and greater potential losses for less experienced investors.
• Restricted orders: Depending on the ECN and brokerage, after-hours trading may be limited to limit orders, which may result in unfilled trades.

Does After-Hours Trading Affect Opening Price?

Yes, it is possible. Since a significant amount of trading occurs outside of regular market hours, the prices of securities may fluctuate from their levels at the close of the regular market.

Can You Actually Trade After Hours?

Yes, it's possible to engage in after-hours trading with the approval from your brokerage. It is important to have a clear understanding of the process and risks involved in after-hours trading before proceeding. Some brokerages may require a meeting with an investment representative to ensure that you are fully aware of the risks associated with after-hours and premarket trading.

Why Can Stocks Be So Volatile in After-Hours Trading?

The lack of participation from traders and investors during after-hours trading results in lower trading volume and reduced liquidity, leading to wider bid-ask spreads, and increased stock price volatility. This challenging trading environment is one of the risks associated with after-hours trading.

Conclusion

After-hours trading of securities takes place outside of the regular trading session, which runs from 9:30 a.m. to 4 p.m. ET. It can be beneficial for investors, but it also comes with its own set of risks. Before getting involved in after-hours trading, it is essential to consider your investment goals, risk tolerance, and trading style. While most investors may prefer to stick with the traditional buy-and-hold strategy that can be executed during regular market hours, those who are well-informed and prepared may find after-hours trading to be a useful investment tool worth exploring.