What is After Hours Trading?

Mon Feb 15, 2021, 02:23 pm | by Caitlin McCormack | No comments

Most people adhere to a strict bedtime routine — brush their teeth, lock the doors, and slide between the sheets. But as most of the world starts to wind down, do you also tuck in your outstanding stock market positions at night? Did you know that you could have more time to trade the stocks you love?

Let’s face it; you may be going to bed but the market isn’t. Somewhere across the globe, news is breaking, data is being released, and markets are responding. And if you have positions that weighed in on your mind during the regular trading day, it’s often during the after-market hours that those thoughts and feelings become acutely felt.

Today, we’ll shed some light on what keeps traders up at night — beyond normal trading hours — and how you can leverage the same.

Can You Trade During After Hours?

Traditionally, the Wall Street bell means trading floors are open from 9:30 a.m. EST to 4 p.m. EST during normal business days. But when the curtains close on the regular day trading hours, new electronic ones open from 4:00 p.m. to 8:00 p.m. — after-hours trading or extended-hours trading.

Depending on your brokerage, you may still be able to buy and sell securities after the market closes. Brokerages with access to the after-hours electronic communications networks (ECNs) can help you keep trading. Popular electronic communication networks include NYSE Archipelago, Instinet, Market XT, and Island.

During the after-hours trading session, the price shown on a stock’s detail page is its real-time price. All orders made outside the regular market hours are usually queued and fulfilled either during the extended hours trading or near market open, according to your instructions.

Intriguing about this strategy is the fact companies typically report their quarterly earnings either before the open bell or after the close, so the after-hours trading period can help you explore positions outside of regular trading hours. But you should exercise caution. Stocks are normally less liquid in the after hours, more so right after or before a news release.

Pre-market Trading vs. Post-Market Trading

After-hours trading can be separated into pre-market and post-market trading. For U.S.-listed stocks, a large portion of the day’s volume trades are performed in the post-close and pre-open sessions during which earnings news releases and other high-profile events take place. But how do both trading sessions compare? Let’s find out.

Pre-market trading is any stock market activity that happens before the regular market session opens. For instance, while most traders can only access the stock market from 9:30 a.m. EST, pre-market trading lets you access markets from as early as 4 a.m. to 9:30 a.m. EST. However, it doesn’t necessarily mean that you can complete trades during these hours. Besides, different brokers will have different rules or available times for premarket trading.

Post-market trading lets you trade the U.S. stock market after curtains close on the main session, usually from 4:00 p.m. to 8:00 p.m. EST. You can trade during the post-close session as long as your broker allows it, except you may pay an extra cost for this privilege. There’s also a chance that your order may not be executed.

After hours differs from regular trading in that traders don’t really need an exchange to execute trades. Instead, millions trade stocks through electronic communication networks that match up buyers and sellers to help execute trades.

Ultimately, stocks move after hours for the same reasons they move during the regular market session — people are buying and selling.

How Trading After Hours Works

Trading in U.S. stocks outside the regular market sessions isn’t a new phenomenon. For years, market professionals and institutional investors have sent their after-hours orders to brokers for execution on ECNs or non-U.S. markets.

After-hours trading or extended-hours trading occurs outside of the regular 9:30 a.m. to 4:00 p.m. trading hours. After-hours trading may occur after or before regular trading hours, and the duration of the trading sessions vary between markets and trading platforms.

Extended-hours trading is made possible by electronic communications networks (ECNs) — electronic trading systems that automatically match buy and sell orders at specific prices, letting individual traders and brokerage firms trade directly among themselves without needing an exchange. Trade executions are achieved by matching orders within the ECN order book with other available orders at the price you specify.

Within the order book, orders are ranked first by price (better priced orders will come first) and second by time (earlier orders placed at the same price level come first). All the orders placed during the extended-hours trading sessions are rendered void if unfilled at the end of the session, partially or in whole. Partial order executions can also occur. You must re-enter expired orders during the regular market session if you still want to have the trades executed.

The ability to execute trades after hours and the rules involved depends on your brokerage. Most major brokerages’ after-hours trading sessions run between 4:00 and 8:00 p.m., though it isn’t a universal standard. For instance, TD Ameritrade opens its after-hours sessions 15 minutes after market close while some other brokers have a shorter after-hours trading period.

Some brokerages will also charge additional fees for facilitating after-hours trading. Most notable is E*TRADE which charges a $0.005 fee per share for after-hour trades, which translates to $5 on a 1,000-share trade.

Rules governing the order types you can place also vary among brokers. However, most brokers currently accept limit orders during extended-hours trading to protect against price volatility. A limit order simply lays the maximum price you’re willing to pay for a buy order or the minimum price you can accept for a sell order, otherwise, your trade won’t go through. Stop orders and other more complex orders are not accepted in the extended hours trading session.

Be sure to read your brokerage’s after-hours trading policies and fine print to understand your permissions and restrictions.

Risk of Trading After Hours

After-hours trading is just as risky as it may be lucrative. While many investment opportunities come with extended hours trading, you should consider these risks before joining the after-hours bandwagon:

  • Lack of liquidity. The ability to convert stock into cash is a crucial aspect of trading and it depends on the existence of buyers and sellers. During after-hours, you can expect less trading volume for some stocks, which makes it difficult to execute some trades. Some stocks may not trade entirely during this session. This is unlike during regular trading hours when buyers and sellers of most stocks fiercely compete on prices to attract trading interest.
  • Price volatility. Stocks with little trading activity may experience significant price fluctuations than would be seen during regular trading hours. News releases made during after-hours may have a significant impact on stock prices.
  • Large Quote Spreads. Less stock market trading activity during extended hours could mean broader spreads between the bid and ask prices. Consequently, it may be more difficult to get your order executed or to land as favorable a price as you would during the regular trading hours.
  • Competition with professional traders. Most of the after-hours traders are institutional investors like mutual funds who may have access to more information than the individual investor.
  • Restriction to limit orders. Most electronic trading systems currently permit only limit orders — you must enter a price at which you’d like an order executed. And while a limit order ensures you won’t buy for more or sell for less, your order remains at risk of not being executed if the market swings away from your price.
  • Computer delays. Similar to online trading, your after-hours trading will probably encounter delays or failures in order execution. And if your order must be routed from a brokerage firm to an electronic trading system, computer failures could prevent or delay your order from reaching the system.

Benefits of After-Hours Trading

It’s not all doom and gloom with after-hours trading. There are equally as many benefits you can enjoy by trading outside the regular market hours.

  • Convenience. For most people, the regular trading hours overlap with their busiest hours of the day. After-hours trading lets you access the stock markets when it’s most convenient for you. You’ll essentially trade on your schedule, not the market’s.
  • Ability to react to news events. With news breaking overnight, you need a way to react right when a market-moving event takes place — after-hours trading lets you leverage that. For instance, a company you own shares of may release its quarterly earnings after the market closes. Depending on the outcome, the stock’s price can move more than it would during normal trading hours. Trading the extended-hours sessions can let you capture these potential opportunities as they unfold.
  • Activity in foreign markets. Foreign markets like European or Asian markets may influence prices on U.S. markets. With most activity on these markets happening outside core U.S. market hours, extended-hours trading lets you leverage opportunities around these events.
  • Potentially cheaper prices. You can sometimes catch cheaper prices for stocks or exchange-traded funds during the after-hours session. This may be attributed to less market competition since there are fewer traders competing for prices. However, this is far from an assurance that you’ll land better prices.

Final Thoughts

After-hours trading has the potential to be a real game-changer, particularly on those occasions when markets make huge moves outside normal hours. But before you join in the after-hours dance, you need to familiarize yourself with the differences between regular and after-hours trading, especially the risks.

Consult your broker and read all disclosure documents on this option. And as with trading during the regular hours, the services offered by a broker during after-hours vary. Shopping around will help you find a brokerage firm that best suits your trading needs.