After-Hours Trading: What it is, how it works, advantages, risks, example
What is After-Hours Trading (AHT)?
Securities trading begins at 4 pm U.S. Eastern Time, after major U.S. stock markets close. After-hours trading can last until 8 pm though the volume usually drops much earlier. After-hours trading is done through electronic communications networks.
Understanding After-Hours Trading
Investors and traders engage in after-hours trades for many reasons. They may prefer to trade with fewer participants, or their schedules require it. They may want to change in response to news breaking after the stock market’s closing. They may also want to close a position before going on vacation.
After-hours trading is trading that occurs after the regular trading hours, usually up to 8 pm. Premarket trading occurs before normal market hours, usually between 7 am and 9:25 am. Together, premarket and after-hours trades are known as extended-hours trading.
The exact time of extended trading hours depends on whether an investor is using an ECN or the financial institution that accepts their orders. Wells Fargo, for example, allows after-hours trades from 4:05 pm. ET until just five p.m.1
ECNs (Electronic markets) are used for after-hours trading and automatically try to match buy and sell orders. Trades are completed if they can. Exchanges are not met if they cannot. Quotes are only available on the electronic market that is being used. Investors can access other ECNs, but this is not guaranteed.
After Hours Schedule
After-hours trading can occur in two periods: after-hours (after-hours but on the same calendar day) or before-market . (After-hours but the following calendar day, before the opening. Premarket trading is often done between 4:00 and 9:30 am. Premarket trading occurs between 4:00 am. ET. Trading after hours occurs most often between 4:00 and 8:00 pm ET until 8:00 pm. ET.
Please note that the hours of operation and posting times for trade data may vary between exchanges. Pre-trade data for NASDAQ will be available from 4:15 am. ET until 7:30 am. The following day’s ET will be displayed from 4:15 pm. After-hours trades will be posted from 4:15 pm 2
Factors to consider
Volume
After-hours trading volumes can spike when new stock is released but usually decrease as the session continues. By 6 pm, the volume growth usually slows down. There is a significant risk that investors may trade illiquid shares after hours.
Price
In after-hours sessions, not only is volume often higher than usual, but also the price. After-hours spreads are not uncommonly wide. Spread is the difference between the bid price and the asking price. The space can be much wider during a low-volume trading session due to the lower number of shares traded.
Participation
After-hours trading can be risky if there are not enough participants. Some investors and institutions might choose not to participate in After-hours Trading regardless of news or events.
After-hours trading can cause a stock’s price to drop sharply, only to rebound the following morning at 9:30 am. Many institutional investors express their views on price movements during after-hours sessions by trading when the market reopens.
It is easier to drive prices up or down in after-hours trades because the volume is low and spreads are large. It takes fewer shares and businesses to impact the stock price significantly. After-hours orders are usually restricted to limited orders. Even if your broker doesn’t limit them, you should consider using them to protect yourself against unexpected price changes, and order fills.
The advantages of after-hours trading
Some traders and investors may find it essential to make trades after the stock exchange’s regular business hours and have them completed. Trading after-hours has certain advantages.
Opportunity
Investors can trade news that could move the markets, whether released before or after the market opens. Examples include the monthly earnings report or the jobs report. Investors can also take positions based on unexpected events that may drive prices higher (or down).
Investors who missed the opportunity to purchase stock during regular market hours the day before it became ex-dividend may find that after-hours trading is an advantage. Investors could buy the stock in after-hours trades to qualify for dividends.
Convenience
Traders and investors can trade after business hours for a variety of reasons. They may, for example, be busy from 9:30 am to 4:00 pm but still wish to change. Taking or close positions with fewer participants could be part of an overall trading strategy.
Volatility
Volatility can be a bad thing in many situations. Investors may also actively seek volatility, as it can offer traders more significant income opportunities. Because of the low volume of after-hours trading, traders can find better prices or experience more substantial price swings because of the lack of shares available.
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