What Is After-Hours Trading, and How Does It Work?

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Updated on Monday, December 10, 2018

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Are you interested in trading stocks? If you pay attention to financial media, chances are you’ve heard that “the market moved lower in after-hours trading” at some point. While the stock exchanges might be closed, that doesn’t mean trading isn’t happening — and you might be able to profit as a result.

Here’s what you need to know about trading in the hours after the market is “closed.”

How after-hours trading works

What is after-hours trading? Trading in the after-hours session is just what it sounds like: buying and selling stocks after regular market hours are over. The New York Stock Exchange (NYSE) has a “core” trading session on weekdays from 9:30 a.m. to 4 p.m. ET, as does the Nasdaq. However, investors can continue to make certain trades after the market closes for the day.

The Nasdaq allows for an after-hours session from 4 p.m. to 6:30 p.m. ET, and the NYSE’s Arca electronic communication network (ECN) has a late trading session from 4 p.m. to 8 p.m. ET. You also can find regional exchanges with their own after-hours trading.

Using ECNs for after-hours trading

Aftermarket trading makes use of ECNs that connect buyers and sellers. ECNs are used for trading currencies and options in addition to stock market transactions.

According to the Securities and Exchange Commission, ECNs are considered alternative trading systems. They are computer-based and can manage transactions based on the best bid and ask quotes. You place your order with certain parameters, and the computer automatically looks for something that matches — and then executes the trade.

In most cases, you still need to place orders through your broker in order to participate in after-hours trading in the stock market. However, thanks to the rise of the internet and technology surrounding investing, many brokers can accommodate after-hours orders.

Check with your online broker to see when and how to place orders after the market closes. For example, your broker might make you wait until 4:05 p.m. ET to start placing orders even though, technically, aftermarket trading has already started.

Limits on types of orders for aftermarket trading

Realize, though, that you can place only certain types of orders during after-hours trading. In many cases, you’ll find that you can request the following types of trades after the regular markets have closed:

  • Buy
  • Buy to cover
  • Sell
  • Short sale

However, many brokers require that most (or even all) of your orders be limit orders. There also might be additional limits as to the timing of placing and executing different types of orders. It’s important to understand your broker’s after-hours trading policies before you start.

Can you trade before the market opens?

After-hours trading often is finished by 8 p.m. ET. But what if you want to trade early in the day? For that, exchanges also offer premarket trading.

The Nasdaq offers premarket trading from 4 a.m. to 9:30 a.m. ET, while the NYSE offers an early trading session from 7 a.m. to just before 9:30 a.m. ET. However, the NYSE Arca has a session that starts at 4 a.m. ET. With the NYSE, you actually can enter orders and queue them up half an hour before the open of the early auctions.

Together, aftermarket trading and premarket trading are known as extended-hours trading.

Why people trade stocks during extended hours

The news doesn’t stop when the market closes, especially when you consider that market hours don’t coincide exactly with acknowledged business hours. You never know when a major economic event, report or other news will break. Extended-hours trading allows investors to move on the news quickly rather than having to wait for the market to open before making a move.

Additionally, not everyone is available to trade during the day. Like a bank branch that stays open late or opens early, extended-hours trading is more convenient for some investors.

It’s also helpful to technical traders who like to run their numbers on the final transactions of the day. Using that information, it’s possible to buy or sell immediately during after-hours trading, depending on the patterns they see at the end of the day.

Risks of extended-hours trading

Any type of investing comes with a level of risk — and that’s true of after-hours trading. Before you decide to get involved with extended-hours trading, it’s important to understand that there are downsides.

  • Lower liquidity: Not every equity is available during after-hours trading. Additionally, with fewer investors involved, it’s not always possible to find the trades you want. You might want to make a trade that involves 1,000 shares, but there might be only 800 available at that time. Without market liquidity to meet your parameters, your orders might not be executed.
  • Bigger spreads: With extended-hours trading, there’s a bigger difference between the bid price and ask price. As a result, you might have a harder time getting a good price on your transaction.
  • Higher volatility: Prices have the potential to fluctuate wildly during extended-hours trading. Because of lower volume and liquidity, it’s more likely that small pieces of news have outsize impacts.
  • Competition against bigger investors: Institutional investors have been engaged in aftermarket trading for much longer than individuals. Plus, they’re often bigger players with access to more resources. You’re directly matched against these investors, and it can be hard to compete when you’re an average investor.

Even with these risks, though, some investors find it worthwhile to engage in extended-hours trading. Carefully consider your own risk tolerance before you move forward.

Bottom line

After-hours trading can be a great way to boost your portfolio’s returns. It allows you to move quickly on news and events that take place outside normal trading hours, potentially giving you an edge.

However, there are risks associated with aftermarket trading, and it’s not suitable for all investors. If you decide to try extended-hours trading, make sure to use only money you can afford to lose and that it fits with your overall long-term investing strategy.

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