After-hours trading is securities trading that starts at 4 p.m. U.S. Eastern Time after the major U.S. stock exchanges close. The after-hours trading session can run as late as 8 p.m., though volume typically thins out much earlier in the session. Trading in the after-hours is conducted through electronic communication networks (ECNs).
Key Takeaways
- After-hours trading starts once the day’s normal trading session closes at 4 p.m. and ends at around 8 p.m.
- Premarket trading sessions are also available to investors, generally from 7 a.m. to 9:25 a.m.
- After-hours and premarket trading are referred to as extended-hours trading.
- Advantages include convenience and opportunity.
- Risks include low liquidity, wide bid-ask spreads, and order restrictions.
Understanding After-Hours Trading
Traders and investors engage in after-hours trading for various reasons. They may prefer trading with fewer market participants or have schedules that require it. They may want to take positions as a result of news that breaks after the close of the stock exchange or close out a position before vacation.
Generally, after-hours trading refers to trading that takes place after normal market hours and up until about 8 pm. Premarket trading refers to trading that takes place before the start of normal market hours, generally from 7 a.m. until 9:25 a.m. Together, after-hours and premarket trading are referred to as extended-hours trading.
Electronic markets (ECNs) used in after-hours trading automatically attempt to match up buy and sell orders. If they can do so, trades are completed. If they can’t, trades remain unfilled. Quotes provided are limited to those available through the electronic market used.
After Hours Schedule
After-hours trading may occur during two periods: after hours (after market close) or pre-market (prior to the next opening). Pre-market trading often occurs between 4:00 a.m. ET and 9:30 a.m. ET. After hours trading often occurs between 4:00 p.m. ET and 8:00 p.m. ET.
Different exchanges may have varying hours and trade data posting times. For example, NASDAQ pre-trade data will be posted from 4:15 a.m. ET to 7:30 a.m. ET of the following day, while after-hours trades will be posted from 4:15 p.m. ET to 3:30 p.m. ET of the following day.
Factors to Consider
Volume
In after-hours trading, the volume for a stock may spike on the news release but typically thins out as the session progresses. The trading volume generally slows significantly by 6 p.m., increasing the risk of trading illiquid stocks after-hours.
Price
Volume sometimes comes at a premium in after-hours trading sessions, alongside price. The spreads—the difference between bid and ask prices—can be significantly wider in after-hours due to fewer shares trading.
Participation
If liquidity and prices weren’t enough to make after-hours trading risky, the lack of participants may do the trick. It’s possible for a stock to fall sharply in the after-hours only to rise once the regular trading session resumes the next day.
Since volume is thin and spreads are wide, pushing prices higher or lower is easier, hence orders are usually restricted to limit orders. Consider limit orders as a means to protect yourself from unexpected price swings and order fills.
Standard Trading vs. After-Hours Trading
| Standard Trading | After-Hours Trading |
|---|---|
| Orders placed anytime and executed from 9:30 a.m. to 4 p.m. ET. | Orders placed and possibly executed after 4 p.m. through 8 p.m. ET |
| Takes place on stock exchanges and Nasdaq via market makers and ECNs | Takes place via ECNs |
| No limit on order size | 25,000 share maximum order size |
| No restrictions on order type | Orders normally restricted to limit orders |
| Orders can carry over to subsequent sessions | Orders override within same session |
| Wide variety of securities traded | Most listed and Nasdaq securities available |
| Large volume, greater liquidity = executed trades | Orders may not get filled due to lower liquidity |
Advantages of After-Hours Trading
After-hours trading offers unique advantages.
Opportunity
Trade on news that moves markets released after the market closes or before it opens, such as earnings reports. Also, gain opportunities to trade in time for dividends.
Convenience
Traders and investors might seek after hours for flexibility, balancing it alongside busy schedules or trading strategies centered on fewer participants.
Volatility
Low trading volumes in after-hours can yield larger price swings, attractive for traders chasing greater opportunities.
Risks of After-Hours Trading
Low Liquidity/High Volatility
Expect hard to fill orders due to low volume. The resulting volatility leads to unpredictable pricing.
Price Uncertainty
Limited ECN quotes lead to less accurate pricing.
Competition and Restrictions
Watch for competition from professional traders and various brokerage restrictions limiting order types (e.g., market orders, etc.).
How After-Hours Trading Affects the Stock Price
After-hours trading can impact the stock’s next opening price, especially after important events like earnings reports.
The limited share availability in these markets can result in significant price volatility.
How to Trade After-Hours
To trade after hours, have a brokerage account that offers this feature. Assuming they offer it, place orders through their online platform. Be aware of time restrictions and limitations on order types.
Example of After-Hours Trading
Consider a historical example where Nvidia Corp. saw its shares rise from $154.50 to nearly $169 after reporting quarterly results after market hours. Volume spiked in the initial few minutes but dwindled swiftly thereafter. This showcases both the potential quick gains and later adjustments in broader market activity.
Does After-Hours Trading Affect Opening Price?
It can, as significant after-hours trading may change the security’s price before the next trading session.
Can You Actually Trade After Hours?
Yes, brokerage consent and understanding are required for participation.
Why Can Stocks Be So Volatile in After-Hours Trading?
Limited participants and liquidity contribute to wider bid-ask spreads and heightened volatility.
The Bottom Line
After-hours trading allows for flexibility but introduces higher risks. Consider your investment goals, risk tolerance, and trading style before diving into extended-hours trading.
Related Terms: electronic communication networks (ECNs), trading volume, bid-ask spread, liquidity, market makers.
References
- Investor’s Business Daily. “After-Hours Trading: Here’s What It Is And Why It Can Help You In The Stock Market”.
- NASDAQ. “After-Hours.”
- Fidelity. “Extended Hours Trading-Am I authorized to place extended hours trades?”
- Nvidia. “NVIDIA Announces Financial Results for Fourth Quarter and Fiscal 2019”.
