What Is After-Hours Trading?

After-hours trading refers to the trading of securities that takes place after the major U.S. stock exchanges close at 4 p.m. U.S. Eastern Time. This trading session can extend until 8 p.m., but the volume typically decreases earlier in the session. After-hours trading is facilitated through electronic communication networks (ECNs).

Key Takeaways

• After-hours trading commences after the regular trading session closes at 4 p.m. and continues until around 8 p.m.
• Premarket trading sessions are also available, generally running from 7 a.m. to 9:25 a.m.
• After-hours trading and premarket trading collectively make up extended-hours trading.
• Advantages of after-hours trading include convenience and potential opportunities.
• Risks associated with after-hours trading include low liquidity, wide bid-ask spreads, and order limitations.

Understanding After-Hours Trading

Traders and investors participate in after-hours trading for various reasons. Some prefer trading with fewer participants in the market, while others may have constraints in their schedules. Additionally, market-moving news released after regular trading hours may prompt investors to take positions or close existing ones before scheduled absences.

After-hours trading, taking place after normal market hours, typically until 8 p.m., contrasts with premarket trading that precedes regular market hours, commonly from 7 a.m. to 9:25 a.m. Together, these trading sessions are known as extended-hours trading.

The specific timing of extended-hours trading can vary based on the ECN used by investors or the financial institution handling their orders, such as Wells Fargo allowing after-hours trading from 4:05 p.m. ET until 5 p.m.

Electronic markets, or ECNs, used in after-hours trading automatically match buy and sell orders. If a match is found, trades are executed; otherwise, orders remain unfilled. Quotes are limited to those available through the ECN used, and access to other participating ECNs is not guaranteed for investors.

After Hours Schedule

After-hours trading occurs during two periods: after hours, following market close on the same calendar day, and pre-market, after market close on the preceding calendar day but before the next opening. Pre-market trading typically runs from 4:00 a.m. ET to 9:30 a.m. ET, while after-hours trading usually extends from 4:00 p.m. ET to 8:00 p.m. ET.

Different exchanges may have varying hours and data posting times. For instance, NASDAQ pre-trade data is usually posted between 4:15 a.m. ET and 7:30 a.m. ET the following day, while after-hours trades are typically posted from 4:15 p.m. ET to 3:30 p.m. ET the next day.

Factors to Consider

Volume

In after-hours trading, stock trading volume may initially spike upon news release but often diminishes as the session progresses, posing a risk of trading illiquid stocks as volume significantly slows by 6 p.m.

Price

Price in after-hours trading may come at a premium, with wider bid-ask spreads compared to normal trading due to reduced shares trading, potentially leading to substantial price impacts.

Participation

Lower liquidity in after-hours trading, coupled with fewer participants, increases trading risks. Institutional investors often observe after-hours price action to inform their trades during regular market hours.

Thin volume and wide spreads permit easier price manipulation in after-hours trading, necessitating the use of limit orders to mitigate unexpected price fluctuations and order fills.

Standard Trading vs. After-Hours Trading

Advantages of After-Hours Trading

Engaging in after-hours trading allows traders and investors to trade on newly released market-moving news, giving them unique opportunities not available during regular trading hours.

Opportunity

After-hours trading provides the chance to react to news impacting markets released post-market closure, such as important reports or unexpected events affecting stock prices.

Convenience

For traders with limited availability during regular trading hours, after-hours trading offers flexibility to manage positions when market participants are reduced.

Volatility

Lower trading volume in after-hours trading may result in price volatility, creating opportunities for profit or loss due to price fluctuations influenced by scarce available shares.

If technical issues disrupt the ECN used for after-hours trading, brokers may attempt to redirect orders to other participating ECNs to ensure order completion; otherwise, they might need to cancel all after-hours session orders.

Risks of After-Hours Trading

Understanding the risks associated with after-hours trading, on top of inherent stock trading risks, is crucial for investors considering such trading activities, as certain brokerages may mandate discussions with representatives to acknowledge and accept these risks.

Low Liquidity/High Volatility

After-hours trading’s low volume can hinder transactions, leading to volatile prices and potential difficulty in executing orders due to limited liquidity.

Price Uncertainty

Limited availability of the best prices during after-hours trading can result in wider bid-ask spreads and uncertain order fills, as prices provided are typically from a single ECN and not a consolidated source.

Competition and Restrictions

Professional traders leveraging after-hours trading can introduce heightened competition and increased losses for less experienced traders, resulting from limited available shares and potential order restrictions on certain ECNs and through brokerages.

Pros

• May allow investors to capitalize on early opportunities.

• Offers traders greater flexibility compared to standard trading hours.

• Can present enhanced profit possibilities due to increased volatility.

• Enables investors to respond to new market information promptly.

Cons

• Often results in low liquidity, making transactions challenging.

• Typically leads to higher price volatility due to wider bid-ask spreads.

• May involve increased competition due to limited share availability.

• Could lead to order restrictions by your broker.

How After-Hours Trading Affects the Stock Price

The impact of after-hours trading on a stock’s opening price in the subsequent regular trading session can be significant, particularly following events like earnings releases or in scenarios of extremely low liquidity.

Due to limited available shares in after-hours trading, stock price movements during this period may not resolve until the next trading day, potentially leading to temporary price volatility as the market adjusts to address liquidity shortages.

Additionally, after-hours trading may influence stock prices if a company announces significant news or earnings post-market closure, potentially affecting the security’s valuation and prompting trading activities based on the news. Large news may attract more after-hours traders, further influencing the subsequent day’s opening price.

Furthermore, after-hours traders may engage in price discovery, where they negotiate prices based on supply and demand dynamics, shaping a stock’s post-market price before the next trading session opens.

How to Trade After-Hours

To engage in after-hours trading, ensure you have an account with a brokerage offering such services since not all brokerages support after-hours trading. Confirm available after-hours trading hours with your broker as they may vary between firms.

If your brokerage supports after-hours trading, you can place orders through their online platform. Note that while the process is similar to regular trading hours, certain order types may be restricted. For example, limit orders may not be available, and market orders may face partial fills due to order book illiquidity.

Some brokerages, such as Charles Schwab, may not allow certain order types like stop, stop-limit, fill-or-kill, immediate-or-cancel, or all-or-nothing orders during after-hours trading sessions.

Example of After-Hours Trading

For example, in 2019, Nvidia Corp. experienced significant movement following an earnings report, with its stock price jumping during after-hours trading but subsequently retracting after regular trading hours resumed the next day.

After-hours trading volume and prices can substantially impact a stock’s next-day performance, demonstrating the potential risks and returns associated with trading outside regular market hours.

Does After-Hours Trading Affect Opening Price?

After-hours trading activities can indeed influence a stock’s opening price, with post-market trading affecting subsequent day’s market performance.

Can You Actually Trade After Hours?

Yes, provided your brokerage permits after-hours trading. Ensure you comprehend the workings and risks of after-hours trading, potentially involving discussions with your broker to navigate the complexities of trading outside regular market hours.

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

Lower trading activity and liquidity in after-hours sessions mean fewer market participants, leading to wider bid-ask spreads and increased stock price volatility, creating a challenging trading environment.

The Bottom Line

After-hours trading offers investors a unique trading opportunity beyond regular market hours, but it comes with increased risks due to lower liquidity and heightened price volatility. Before delving into after-hours trading, evaluate your investment objectives, risk tolerance, and trading strategies to make informed decisions.

While many investors may prefer conventional buy-and-hold strategies during regular trading hours, after-hours trading can serve as a valuable tool for those willing to navigate its challenges and explore its potential benefits.