After-Hours Trading: How It Works, Advantages, Risks, Example
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 after-hours is conducted through electronic communication networks (ECNs).
Understanding After-Hours Trading
Traders and investors engage in after-hours trading for a variety of reasons. They may prefer trading with fewer market participants, or their schedules may require it. They may want to take positions due to news that breaks after the close of the stock exchange. Or, they may want to close out a position before they leave on vacation.
Generally, after-hours trading refers to trading after normal market hours and until about 8 p.m. Premarket trading refers to trading before the start of normal market hours, generally from 7 a.m. until 9:25 a.m. Together, after-hours trading and premarket trading are referred to as extended-hours trading.
The precise times of extended-hours trading can depend on the ECN an investor uses or the financial institution where they place their orders. For instance, Wells Fargo allows after-hours trading from 4:05 p.m. ET until just 5 p.m.
Electronic markets (or 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. Investors may have access to other participating ECNs, but it isn’t guaranteed.
After Hours Schedule
After-hours trading may occur during two periods: after-hours (after market close but on the same calendar day) or pre-market (after market close but on the subsequent calendar day before 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.
Note that 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, after-hours trades will be posted from 4:15 p.m. ET to 3:30 p.m. ET.
Factors to Consider
Volume
In after-hours trading, the trading volume for a stock may spike on the initial release of news, but most of the time, it thins out as the session progresses. The growth of volume generally slows significantly by 6 p.m. So, there is a substantial risk that investors will be trading illiquid stocks after hours.
Price
Price and volume sometimes rise in after-hours trading. Wide after-hours spreads are common. The spread is the bid-ask differential. With fewer shares trading, the spread may be much greater than usual.
Participation
Lack of participation may make after-hours trading unsafe if liquidity and prices aren’t enough. Thus, certain investors and institutions may avoid after-hours trading regardless of news or occurrences.
A stock may fall significantly after hours yet rebound sharply when trading restarts at 9:30 a.m. Once the regular market opens, many huge institutional investors trade based on their after-hours price action views.
Price manipulation is easier in after-hours trading due to limited volume and big spreads. Fewer shares and trades are needed to affect a stock’s price significantly. Thus, after-hours orders are frequently limited. Consider them anyhow to avoid price volatility and order fulfillment if your brokerage doesn’t limit them.
Advantages of After-Hours Trading
Some traders and investors value the ability to place and fill deals after stock exchange business hours. After-hours trading has benefits.
Opportunity
Investors might trade on market-moving news like the monthly employment report or earnings report after or before the market starts. Investors can also react to unforeseen developments that may raise or drop prices.
Dividend stock investors who miss the chance to buy a stock before the ex-dividend date may benefit from after-hours trading. The investor could buy it after hours to get the payout.
Convenience
For several reasons, dealers and investors may trade after hours. They may wish to trade despite being busy from 9:30 to 4 p.m. It may be part of a trading strategy to take or close positions with fewer participants.
Volatility
Many times, volatility is detrimental. In some circumstances, investors actively desire volatility to boost trading profits. Due to limited after-hours trading traffic, traders may find better premarket prices or face higher price volatility due to a scarcity of accessible shares.
After-Hours Trading Risks
Knowing the hazards of after-hours trading is crucial. These are in addition to stock trading hazards.
To properly understand and accept those risks, some brokerages demand investors sign the ECN user agreement and meet with their broker before trading.
Low liquidity/high volatility
Low-volume trading occurs after hours. That makes buying and selling stocks difficult or impossible for investors. Low liquidity can cause erratic prices due to a lack of trades. This can hurt your price and make orders hard to fill.
Price Uncertainty
Since one ECN normally offers after-hours trading prices/quotes, you may not get filled at the best price. They don’t consolidate the best prices like normal trading sessions. Illiquid after-hours trades feature greater bid-ask spreads.
Restrictions and Competition
Professional traders exploit after-hours trading possibilities. This might cause volatility and bigger losses for novice investors. Depending on the ECN and brokerage, after-hours trading may be limited to limited orders, leaving your trades unfilled.
Effects of After-Hours Trading on Stock Price
Before the next trading day, after-hours trading often affects stock prices. This is especially true after earnings release or severely low liquidity.
As mentioned above, after-hours trading may generate stock swings that last till the next day due to low share availability. Price volatility may be brief when the market captures price surges to resolve securities liquidity shortages after regular trading hours.
If the company releases critical news or earnings after the market closes, after-hours trading may affect stock prices. This information may affect the security’s valuation, and traders may try to capitalize on it. Large news may increase after-hours trading, raising or lowering the next day’s starting price.
Last, after-hours traders may price discover, where buyers and sellers negotiate a price based on supply and demand. This procedure may change a stock’s price after hours as each side assesses its sentiment before the next trading day.
Trading After Hours
After-hours stock trading requires a brokerage account. Some brokerage firms offer after-hours trading; ask your broker. After-hours trading hours differ for each brokerage firm, so know when too.
If your brokerage allows after-hours trading, you can order online. Place an order in after-hours trading like you would during regular trading hours. However, major variances exist.
Most critically, after-hours trading rarely allows all order types. Due to order book illiquidity, limit orders may not be available, and market orders may only be partially filled. Charles Schwab prohibits stop, stop-limit, fill-or-kill, immediate-or-cancel, and all-or-nothing orders.
Example of After-Hours Trading
Nvidia Corp. (NVDA) is a good illustration of after-hours trading and its risks. Nvidia published 2019 quarterly earnings. After the news, the stock rose to over $169 from $154.50 in 10 minutes.
The graphic shows that volume was constant for 10 minutes before dropping rapidly around 4:30 p.m. The stock rose roughly 6% in the first five minutes, with 700,000 shares traded. Between 4:25 and 4:30, volume dropped to 350,000 shares. Only 100,000 shares traded by 5 p.m., yet the stock remained at $165.
However, the next morning was different. When normal trading resumed, traders and investors weighed Nvidia’s performance. Nearly 2.3 million shares moved from 9:30 to 9:35 a.m., more than three times the previous day’s after-hours volume. The price fell from $164 to $161.
The stock fell throughout the day, closing at $157.20. That was $3 more than yesterday’s close. It also fell from the almost $15 after-hours hike. Investors lost much of their after-hours gains that session.
Though historical, this circumstance illustrates the opportunities traders may discover in after-hours trading and how early news movement can offer gains that saturate by market opening.
Opening Price: Does After-Hours Trading Matter?
Yes, it can. Since much trading occurs after hours, security prices can alter from when the normal market closed.
Truly Trade After Hours?
Yes, if your brokerage allows it. You should first comprehend after-hours trading and its risks. Your brokerage may need you to meet with an investment professional to discuss after-hours and premarket trading issues.
Why are after-hours stocks volatile?
Fewer traders and investors reduce trading volume and liquidity. Wider bid-ask spreads increase stock price volatility. After-hours trading might be difficult.
The Verdict
Securities trading after 4 pm ET might last until 8 pm ET. It has benefits but is dangerous for investors. In addition to comprehending the dangers, consider your investing goals, risk tolerance, and trading style before investing.
Most investors may prefer the buy-and-hold strategy during regular trading sessions. After-hours trading may be a helpful investment instrument for those willing to try.
Conclusion
- After-hours trading starts once the day’s normal trading session closes at 4 p.m. and ends around 8 p.m.
- Premarket trading sessions are also available to investors from 7 a.m. to 9:25 a.m.
- After-hours trading and premarket trading are referred to as extended-hours trading.
- The advantages of after-hours trading include convenience and opportunity.
- Risks include low liquidity, wide bid-ask spreads, and order restrictions.
