What Is After-Hours Trading?

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What Is After-Hours Trading?

What Is After-Hours Trading?

After-hours trading is defined as securities trading that occurs after the main U.S. stock exchanges close at 4 p.m. Eastern Time. The after-hours trading session may go until 8 p.m., but activity often thins down considerably sooner. After-hours trading is carried out using electronic communication networks (ECNs).

Key Takeaways

  • After-hours trading begins after the regular trading session concludes at 4 p.m. and ends about 8 p.m.
  • Investors may also participate in premarket trading sessions, which run from 7 a.m. until 9:25 a.m.
  • Extended-hours trading include both after-hours and pre-market trading.
  • The benefits of trading after hours include convenience and opportunity.
  • Low liquidity, huge bid-ask spreads, and order limits are all risks.

What’s After-Hours Trading?

Understanding After-Hours Trading

After-hours trading is done by traders and investors for a number of reasons. They may want to trade with fewer market players, or their schedules may necessitate it. They may desire to take positions as a consequence of news that comes out after the stock market closes. Alternatively, they may choose to end an employment before departing on vacation.

Beyond-hours trading, in general, refers to trading that occurs after typical market hours and until about 8 p.m. Premarket trading is defined as trading that occurs before to the start of regular market hours, which normally occur between 7 a.m. and 9:25 a.m. Extended-hours trading is the combination of after-hours trading and premarket trading.

The exact periods of extended-hours trading might vary depending on the ECN an investor utilizes or the financial institution where their orders are placed. Wells Fargo, for example, permits after-hours trading from 4:05 p.m. ET to 5 p.m. ET.

Electronic markets (or ECNs) used in after-hours trading aim to match buy and sell orders automatically. Trades are performed if they are able to do so. If they are unable to do so, transactions will stay unfulfilled.

After-hours trading normally permits just limit orders to buy, sell, or short, however a certain brokerage may be less restricted. Orders with particular instructions (such as fill or kill or all or none) are not accepted. Furthermore, orders are often only valid during the after-hours trading period in which they are made.

The maximum share amount per order is 25,000.

Quotes supplied are restricted to those accessible on the electronic market. Investors may have access to other ECNs that participate, but this is not guaranteed.

Volume

After-hours trading volume for a stock may jump on the first publication of news, but it usually thins down as the session goes. By 6 p.m., volume growth has often slowed dramatically. As a result, there is a significant danger that investors would trade illiquid equities after hours.

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Price

Not only is volume frequently more expensive in after-hours trading sessions, but so is pricing. It is fairly uncommon for spreads to be wide after-hours. The spread is the difference in pricing between the bid and ask. Because there are fewer shares traded, the spread may be much larger than during a regular trading session.

Participation

If the absence of liquidity and pricing weren’t enough to make after-hours trading dangerous, the lack of participants may be. As a result, regardless of news or events, some investors and institutions may opt not to engage in after-hours trading.

It is very feasible for a stock to fall drastically after hours only to rally when normal trading starts the following day at 9:30 a.m. Many large institutional investors have a particular viewpoint on price behavior during after-hours trading sessions, which they convey with their transactions after the normal market reopens.

After-hours trading is significantly simpler to drive prices up or lower since volume is low and spreads are large. Fewer shares and transactions are required to have a significant influence on the price of a company. As a result, after-hours orders are frequently limited to limit orders. Even if your brokerage does not prohibit them, consider using them to protect yourself against unexpected price movements and order fulfillment.

Standard Trading vs. After-Hours Trading

Standard TradingAfter-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.
Takes place on stock exchanges and Nasdaq via market makers and ECNsTakes place via ECNs
No limit on order size25,000 share maximum order size
No restrictions on order typeOrders normally restricted to limit orders
Orders can carry over to subsequent sessionsOrders normally expire in same trading session they’re placed
Wide variety of securities traded (stocks, options, bonds, mutual funds, ETFs)Most listed and Nasdaq securities are available
Large volume, greater liquidity = executed tradesOrders may not get filled due to lower liquidity

Advantages of After-Hours Trading

Some traders and investors value the opportunity to make transactions and have them completed during trading sessions that occur outside conventional stock exchange business hours. After-hours trading has several benefits.

Opportunity

Investors may trade on market-moving news issued after the market closes or before it starts, such as the monthly employment report or earnings releases. Furthermore, investors might enter positions in reaction to unforeseen developments that they feel will cause prices to rise (or lower).

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After-hours trading may be advantageous to dividend stock investors who miss the opportunity to purchase a stock during normal market hours on the day before the ex-dividend date. The investor might attempt to purchase it after-hours in order to be eligible for the payout.

Convenience

Traders and investors may attempt to trade after hours for a variety of reasons. They may, for example, be occupied from 9:30 a.m. until 4:00 p.m. yet still want to trade. Alternatively, it might be part of a trading strategy to enter or exit positions when there are fewer players.

If the electronic communication network (ECN) you’re using for after-hours trading becomes unavailable for technical reasons, your broker may attempt to route orders to other participating ECNs so that they may be filled. If this is not practicable, a broker may have to cancel all orders placed for the after-hours session.

Risks of After-Hours Trading

If you’re thinking of trading after hours, you should be aware of the hazards involved. Keep in mind that these are in addition to the inherent hazards of stock investing.

Indeed, some brokerages need investors to acknowledge the ECN user agreement and meet with their brokerage representative before they can trade, to ensure that they completely understand and accept the risks. Here’s a quick rundown:

  • Low liquidity: After-hours trading involves low volume trading. This means that it may be difficult (if not impossible) for investors to buy and sell stocks.
  • Price uncertainty: You may not see or get filled at the best available price since the prices/quotes available during after-hours trading are those provided by, usually, one ECN. They aren’t the consolidation of the best available prices that occurs in normal trading sessions.
  • Price volatility: Low liquidity results in volatile prices, which can make orders a challenge to fill.
  • Wider than normal bid-ask spreads: These can indicate an illiquid security, which can be difficult to buy or sell.
  • Competition: Professional traders abound in after-hours trading. This can sparkvolatility and the potential for greater than normal losses for less experienced investors.
  • Restricted orders: Depending on the ECN and brokerage, after-hours trading may be restricted to limit orders, which may mean your trades go unfilled.
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Example of After-Hours Trading

The earnings results of Nvidia Corp. (NVDA) in February 2019 are a great illustration of the difficulty and risks associated with after-hours trading. On February 14, Nvidia released its quarterly results. The stock rose to over $169 from $154.50 in the 10 minutes after the announcement.

The figure indicates that traffic remained constant for the first 10 minutes and then rapidly declined after 4:30 p.m. Around 700,000 shares moved in the first five minutes of trading, and the price rose roughly 6%. Volume, on the other hand, decreased significantly, with just 350,000 shares dealing between 4:25 and 4:30. By 5 p.m., volume had dropped to 100,000 shares, with the stock still trading around $165.

Image by Sabrina Jiang © Investopedia2020

The following morning, however, was a different story. When the market reopened for regular trading, dealers and investors were able to comment on Nvidia’s performance. Nearly 2.3 million shares moved between 9:30 a.m. and 9:35 a.m., more than three times the volume in the first minutes of the previous day’s after-hours trading. The cost has fallen from $164 to $161.

The stock continued to fall throughout the day, eventually ending at $157.20. This was just $3 more than the previous day’s closing. Furthermore, it was a drop from the roughly $15 rise achieved during the after-hours session. Unfortunately, almost all of the after-hours profits achieved by investors during that session were vanished.

Does After-Hours Trading Affect Opening Price?

It very definitely can. Because a significant amount of trading may occur after hours, the prices of securities may differ from their levels when the normal market previously closed.

Can You Actually Trade After Hours?

Yes, as long as your brokerage gives you permission. You should first ensure that you understand how after-hours trading works and the hazards associated. Your brokerage may request that you meet with an investment professional to ensure that you understand the challenges of after-hours and premarket trading.

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

When there are fewer traders and investors in the market, trading volume and liquidity fall. This results in broader bid-ask spreads and, as a result, more stock price volatility. After-hours trading may provide a tough trading environment.

The Bottom Line

After-hours trading in equities happens after the normal trading session concludes at 4 p.m. ET and may linger until about 8 p.m. ET. While it has certain benefits for investors, it may also be highly dangerous. So, in addition to comprehending the dangers, think about your investment objectives, risk tolerance, and trading style before getting involved.

Most investors may want to continue with the tried-and-true purchase and hold approach, which may be used during regular trading hours. After-hours trading, on the other hand, may be a valuable investing tool for individuals who are willing to attempt it.

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