What Is After-Hours Trading & How Does It Work?

Table of Contents:

  1. What Does After-Hours Trading Mean?
  2. How Does After-Hours Trading Work?
  3. Advantages of After-Hours Trading
  4. Risks of After-Hours Trading
  5. How To Be Successful in After-Hours Trading
  6. FAQs About After-Hours Trading
  7. The Bottom Line

Throughout the stock exchange’s history, it operated Monday–Friday, from 9:30 a.m. until the end of trading at 4 p.m. But 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) introduced extended hours in the way 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.

Key Takeaways:

  • 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 Does After-Hours Trading Mean?

As you might expect, after-hours trading occurs when the normal hours of the stock exchange end and the market closes for the day. 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). When trading during either pre-market or after hours, trading is done entirely through ECNs.

After-Hours Trading Times

How long is after-hours trading? The answer is not as simple. The hours to buy and sell stocks after hours can be different, depending on the type of ECN platform a trader uses.

In most cases, after-hours trading in the U.S occurs during the hours of 4–8 p.m., at which time buy and sell orders can be placed and executed. There are some things you’ll 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, you’ll want to pay attention to the information presented above as well as the time that after-hours trading ends. This way, you’ll 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.

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.

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 limit 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 will mean 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:

  • 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.
  • 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 you’re buying in a smarter way.
  • Build your portfolio gradually. Investing isn’t 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.
  • 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.
  • 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.

Graphic of a person pondering their investments for after hours trading

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 limit 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 less 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 limit 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.

The Bottom Line

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 diving in. If you want to know more about investing and are ready to get started, download the Public app.

The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.