Throughout the stock exchanges history, it operated Monday to Friday, from 9:30 a.m. until the end of trading at 4 p.m. However, that all changed in 1991 in acknowledgment of international exchanges’ longer trading hours and the increased competition they presented. Since then, the New York Stock Exchange (NYSE) has introduced extended hours in the form of pre-market and after-hours trading.
To get a better understanding of what after-hours trading is, how it works, and why you may want to (or not!) trade during this time, read on to learn everything you need to know.
After-hours trading occurs when the normal hours of the stock exchange end and the market closes for the day.
As with any type of investing, there are both advantages and disadvantages of after-hours trading.
All after-hours trading is completed digitally through electronic communication networks (ECNs).
What is after hours trading?
After-hours trading refers to the buying and selling of stocks outside of the standard trading hours of 9:30 a.m. to 4:00 p.m. ET on U.S. stock exchanges. This extended session typically occurs between 4:00 p.m. and 8:00 p.m. ET.
Investors and traders use after-hours trading to react to news, earnings reports, or global market events that occur outside of regular market hours.
There was a time when after-hours trading was only for the investing elite, consisting of professional and high-profile investors. However, technology has leveled the playing field, allowing individual and retail investors to engage in pre-market and after-hours trading as well.
During the exchanges regular hours, investors can buy and sell shares of stock on the NYSE, NASDAQ, and other global exchanges, as well as electronic communication networks (ECNs). ECNs are computer-based matching systems that pair buy and sell orders in the market, allowing trades to be completed electronically without the need for any physical presence (aka off-the-floor trading). Trading during either pre-market or after hours is done entirely through ECNs.
Who can trade during the after-hours times?
The stock market operates beyond traditional hours, and after-hours trading provides opportunities to buy and sell before or after regular market times. Heres who can participate in this extended trading session:
1. Individual investors
Advancements in technology allow retail investors to access after-hours trading through Public.com, providing flexibility for those unavailable during standard hours.
2. Institutional investors
Large entities like hedge funds, mutual funds, and pension funds actively participate, using strategies that react to earnings reports, economic data, or breaking news outside regular hours.
3. Market makers
These firms facilitate liquidity in after-hours trading by buying and selling stocks, ensuring smoother transactions even when the market is less active.
Why trade after hours?
After-hours trading allows quick reactions to news, earnings releases, or global events that may impact stock prices. However, it often comes with higher volatility, lower liquidity, and wider bid-ask spreads, making it riskier than trading during regular hours.
Understanding the risks and mechanics of after-hours trading is key. Whether you’re an individual or an institution, having the right tools and knowledge is essential for making informed decisions in this extended market.
After-hours trading times
After-hours trading allows investors to buy and sell stocks outside of the regular market hours. In the U.S., the typical after-hours trading session runs from 4:00 PM to 8:00 PM Eastern Time (ET). This period follows the standard trading hours of 9:30 AM to 4:00 PM ET.
There are some things youll want to keep in mind about after-hours trading.
As we noted earlier, after-hours trading occurs through digital trading platforms like ECNs.
During after-hours trading sessions, only limit orders are permitted.
For a single order, the maximum quantity allowed for purchase is 25,000 shares.
Not all stocks are available to trade after hours.
There is no carryover between trading sessions, so orders must be placed and executed during each session.
Due to low trading volume, orders for shares of stock placed may not be executed. Therefore, re-ordering during regular hours will be necessary. There is also a higher possibility that greater price fluctuations can occur.
The quotes you see may be inaccurate due to activity that occurs after hours, which can interfere with your overall investment strategy.
When jumping into after-hours trading, youll want to pay attention to the information presented above as well as the time that after-hours trading ends. This way, youll have the time necessary to execute your trades without any last-minute glitches.
How does after hours trading work?
When engaging in after-hours trading, you’ll find there are more limits to what you can do due to the fact that all your trading is through electronic communication networks (ECN), which can have significant limits and present additional risks.
The process of trading after-hours is relatively the same as trading during normal hours. You simply log into your brokerage account and place orders for the stocks you want to buy. It then goes through the ECN, matching your price to the shares of stock.
If a match is found, it places your order, and the trade is executed. If no match is found, there will be no trade at all, and you will have to try again during regular trading hours.
Here’s how after-hours trading works:
Order matching: ECNs electronically match buy and sell orders during after-hours trading.
Order types: Investors have access to a variety of order types, including market, limit, and stop-loss orders.
Order routing: To be executed, orders are sent to ECNs or other platforms.
Trade execution: The best price at which a trade is executed is used, and this price could differ from the one used during regular trading hours.
Price discovery: Prices are determined by the interactions of buyers and sellers during after-hours trading.
Liquidity provision: During after-hours trading, liquidity providerssuch as market makersoffer quotes and engage in trades with investors.
Trade reporting: Transactions are reported to the appropriate regulatory agencies, including FINRA and the SEC.
Clearing and settlement: Trades are cleared and settled through the same processes as regular trading hours trades.
Risk management: Brokerages and other market participants use a variety of strategies, like position limits and margin requirements, to mitigate risk during after-hours trading.
All things considered, after-hours trading provides flexibility, but it also carries higher risks and less liquidity, so investors should proceed with caution.
Example of after-hours trading
Imagine a XYZ.co releasing its quarterly earnings report after the stock market closes at 4 p.m. ET. During regular hours, traders might have anticipated strong results, but when the report is released after-hours, it shows weaker-than-expected numbers.
Investors, still eager to react, begin trading shares in XYZ.co during the after-hours session, which typically runs from 4 p.m. to 8 p.m. ET.
As a result, XYZ.co’s stock price may drop significantly before the market opens the next day, allowing investors to adjust their positions in response to the news before regular trading resumes.
However, liquidity is often lower during this time, leading to wider bid-ask spreads and more price volatility, so traders need to be cautious.
Advantages of after-hours trading
If you’re interested in after-hours trading, you’ll be happy to know there are some benefits.
Accessibility and convenience:
Busy schedules can make it difficult to trade during regular trading hours, so having the ability to trade after hours allows you the freedom to research what the stock market did that day and trade accordingly.
React to events:
You may notice that some companies may release information on quarterly earnings or significant news events that impact the company after the market closes. Trading after hours can also allow you to react to those announcements without having to wait until the next trading day and possibly miss out on potential profits.
Potential for lower competition:
Since fewer traders participate in after-hours trading, you may find it easier to execute trades without facing as much competition for shares.
Opportunity to adjust positions:
After-hours trading allows investors to adjust their positions based on late-breaking news or events that occur after the regular trading session.
Flexibility in trading strategies:
Investors can use after-hours trading to implement specific trading strategies that may not be feasible during regular hours due to time constraints or other commitments.
Risks of after-hours trading
Investing in stocks after hours can be just as risky as investing during standard hours. But, when it comes to after-hours trading, you may experience further issues you may not have considered. In order to make educated decisions about engaging in after-hours trading, keep these potential issues in mind.
Restricted or limited orders:
Because after-hours trading is done through ECNs, your orders need to be matched with a buyer or seller at the price you set, which leaves room for orders that can’t be fully executed. This means that you have to re-order during regular trading hours to match the price you’re willing to pay.
Low liquidity:
With low volumes of trading activity, it can be difficult to buy and sell stocks as easily, leaving room for volatile pricing and uncertainty in the execution of orders.
Bid-ask spreads that are wider than normal:
When the overall volume of trades is low, as it typically is after hours, orders may be placed at lower bids or go unfulfilled due to limited shares of stocks available.
Competition:
Individual investors may not have the knowledge to benefit from trading after hours the way professionals can, leaving them with greater disadvantages and more significant losses and volatility.
How to be successful in after-hours trading?
Investing after hours has its challenges, but understanding the limitations can help you avoid unnecessary risk. Fortunately, there are investment strategies that can be adopted (which apply to both regular and after-hours trading) to help investors make smarter decisions and reach their goals. These 5 tips can help you invest more confidently:
Tip #1: Leave your emotions out of investing. Making good investment choices doesn’t work when you become too emotionally invested. The normal ups and downs of the stock market can leave you stressed out and even panicked, leading to unclear thinking and bad decisions. The key is making smart investments based on well-researched and financially sound companies and then letting go, allowing them to grow.
Tip #2: Choose companies you want ownership in. When you buy a share of stock, you become an owner in that company, so it makes sense to think about yourself that way and treat it like any other partnership. What do you want to know before becoming an owner? Financial stability? Plans for growth? Daily operations and marketing strategies? What are competitors doing? Choosing the company instead of stock quotes makes you think about what youre buying in a smarter way.
Tip #3: Build your portfolio gradually. Investing isnt a one-and-done activity. Paying attention to prices, dividends, returns, and growth in companies you’re interested in can be a great strategy for building a diversified portfolio that will allow you to reach your retirement goals.
Tip #4: Plan an investment strategy and stick with it. This can help you stay sane when the market is volatile. Doing your research is crucial when it comes to making sound decisions that you can trust. And it’s that trust that can eliminate going into a full-blown panic when the market dips below expectations.
Tip #5: Avoid the shiny object syndrome. Checking your portfolio once a quarter should keep you informed and able to shut out the noise of daily fluctuations in the market, which can lead to many bad decisions. Keeping a rational mind is knowing what warrants action and what is just noise. Nothing fogs clarity more than watching your investments too closely.
After-hours trading: Do more with Public
After-hours trading has both risks and rewards, so it’s important to understand what they are and learn as much as you can before you start trading. If you want to know more about investing and are ready to get started, signup the Public app.
FAQs about after-hours trading
Is after-hours trading good or bad?
The only one who can determine that is you. Since after-hours trading occurs after the closing bell, there are some risks. As mentioned earlier, risks include restricted or limited orders, low liquidity, wider bid-ask spreads, greater competition, and more uncertainty. However, after-hours trading also offers investors convenience and the ability to react quickly to changes and announcements.
What makes stock prices more volatile in after-hours trading?
When fewer people are trading, which is the case during after-hours trading, there are lower trading volumes and liquidity, which leads to wider bid-ask spreads and a more volatile trading ground.
Does after-hours trading affect opening price?
Yes. Between the closing bell and the next trading day, after-hours trading is in full progress, which can significantly shift stock prices after hours.
What about after-hours options trading?
When options trading, investors can only place limited orders, which means that they won’t execute until they hit a certain price point. Plus, during after-hours trading, there is a good chance orders won’t be executed at all, which can cause some inconvenience for the investor and shift stock prices.
