Business

What Is After-Hours Trading- Overview, Participants, Benefits, And Risks

Despite its formal business hours, the stock market never sleeps. Moreover, stock trading can be different throughout prolonged hours. This article will teach you about after-hours trading.

Any trading that takes place outside of regular business hours is referred to as after-hours trading. After-hours trading begins at 4 p.m. Eastern Standard Time ((EST)) in the United States and continues until 8 p.m. EST. Investors should be aware of the benefits and drawbacks of after-hours trading.

After-hours stock market

After-hours trading refers to the period after the market closes during which an investor can purchase and sell securities outside of regular trading hours. The New York Stock Exchange (NYSE) and the Nasdaq Stock Market are open Monday through Friday from 9:30 a.m. to 4:00 p.m. Eastern time (ET). Trades can be completed anytime between 4 p.m. and 8 p.m. ET during the after-hours session.

Electronic communication networks (ECNs) link potential buyers and sellers without the need for a traditional stock market during these extended trading periods. During the after-hours trading session, trading volume is typically low. This is because there are usually very few active traders during this time. However, if there is major economic news or an unexpected new development at a company, this can change.

After the market ends, traders might expect greater spreads (the difference between the bid and ask prices).

How does after-hours trading work?

After-hours trading is distinct from regular trading on the markets during business hours. Your order is routed through an electronic communication network, or ECN, rather than through the exchange. When compared to normal trading on the Nasdaq or the New York Stock Exchange, this has some drawbacks and hazards.

Most importantly, investors can only purchase or sell shares via limit orders. Orders are matched by the ECN based on limit prices. Furthermore, orders placed after hours are only valid for that particular session. If you’re still interested in the stock, you’ll have to place a new order when trading resumes the next day.

You log into your brokerage account and choose the stock you wish to buy to make an after-hours deal. You then place a limit order in the same way you would during a normal trading session. After-hours trading may incur additional fees from your broker, but many do not double-check.

Your broker then sends your order to the electronic communication network (ECN) that it employs for after-hours trading. The ECN will try to match your order with a buy or sell order on the network. If you order 100 shares of XYZ for $50 apiece, the ECN will search for an order to sell at least 100 shares for $50.

Who can trade after-hours?

Large institutional investors and rich families that were comfortable with unusual trading strategies were formerly excluded from after-hours trading. The trading volume was quite modest. Until the introduction of electronic communication networks (ECNs) in the 1990s, the after-hours market was controlled by large investors.

Many more private investors were able to trade outside of regular exchange hours because of ECNs. As more retail investors became familiar with the ECNs’ hourly trading, the trading volume began to rise. Off-peak trading is available through brokerage firms like Fidelity, Vanguard, TD Ameritrade, and Charles Schwab. For this service, the brokers may charge an extra fee.

Post-market and premarket trading

Trading after hours can be divided into two periods of the day. The post-market trading session is the first. Post-market trading is normally available from 4 p.m. to 8 p.m. ET on most exchanges. Premarket trading, which takes place the morning before the markets open—before 9:30 a.m. ET—is also an option. The exchange determines when the premarket session begins.

Benefits of after-hours trading

After-hours trading carries a lot of risks, but it also has certain potential benefits:

  • Trading on new information: Being able to trade after the regular markets have closed helps you to respond fast to breaking news items or new information before the market opens the next day.
  • Pricing opportunities: Although there is a danger of instability when trading after hours, you may be able to locate some attractive pricing at this time.
  • Convenience: Some investors prefer to trade at off-peak hours, and after-hours trading allows them to do so.

Risks and dangers of after-hours trading

The rise of after-hours trading has provided investors with the opportunity to make significant returns, but you should be aware of some of the risks and perils that come with investing at this time. These are some of them:

  • Less liquidity: During regular business hours, there are much more buyers and sellers. There may be less trading volume for your stock during after-hours trading, making it more difficult to convert shares to cash.
  • Wide spreads: As previously stated, limited trading volume might result in a large spread between the bid and ask prices. As a result, it may be difficult for an individual to have their request fulfilled at a reasonable cost.
  • Individual investors face stiff competition: While personal investors now have access to the after-hours market, they must compete against huge institutional investors who have access to more resources than the average individual investor.
  • Volatility: Compared to regular trading hours, the after-hours market is less volatile. After-hours trading is more likely to see dramatic price changes than regular-hours trading.

While technology can affect trading throughout the regular trading day, there may be additional lags and delays during after-hours trading, which means your trades may not go through.

Here’s an illustration of some of the dangers of trading after hours:

Assume an investor wants to sell $250 worth of stock in a business called XYZ Co. after the regular markets have closed. The highest bid price from the small number of purchasers is $240, owing to the illiquid nature of the after-hours market. She has two options: alter her limit price to $240 and sell immediately, or preserve her original price and risk a partial or unfilled order. At 8 p.m., the trading session comes to a close.

How after-hours trading affects the opening price?

After-hours trading frequently affects a stock’s opening price at the start of the next normal market session. If a stock moves a significant amount on strong volume after hours, the movement is likely to continue over to the next day’s regular market session. However, after-hours stock fluctuations triggered by an after-market results announcement can sometimes be reversed the next morning during the company’s conference call.

How to find the right after-hours stocks?

Investors might react to important events and new information after hours by trading. Late-night breaking news, company earnings reports, or political unrest are examples of these events. Rather than waiting until the next day, such trading lets investors react to new developments as they happen.

Many investors choose equities that trade at a high volume during the day. After hours, stocks with limited volume or that are unlikely to be impacted by after-hours news may have extremely wide bid-ask spreads.

Economic reporting

The news cycle quickly feeds into pre and post-market trading. This may appear to be an intriguing prospect, but having details is one thing; knowing how to act on them is quite another. Investors who aren’t professionals should proceed with caution.

The market is influenced by economic indicators such as the gross domestic product, the consumer price index, US unemployment data, US international transactions, and changes in US industries. Investors can use this information to see how the economy is doing and forecast what might happen in the future. This knowledge will come in handy when deciding what transactions to make and when to make them.

According to Luke Lloyd, wealth adviser, and investment strategist at Strategic Wealth Partners in Independence, Ohio, look at key data points such as inflation, jobs statistics, and consumer and business performance gauges.

“You may use the data points to your advantage and act promptly to buy or sell stocks before the stock market starts or after the stock market closes if you know how each data point can affect certain sectors or stocks,” he says.

Investors can make quick decisions in after-hours trading by analyzing these statistics and comparing estimates to the actual amount issued, according to Lloyd. “That’s how you uncover those money-making arbitrage possibilities.”

Corporate earnings announcements

Companies usually release quarterly earnings data after the market closes or before it opens, which can have a significant impact on after-hours and premarket trading activity.

“Corporate profits and news, such as an acquisition or bankruptcy, will have the greatest impact on single stock values,” adds Denier.

RH (RH) is a home goods firm that released its second-quarter results on September 9. RH stock rose in premarket trading when the company reported better-than-expected earnings, and shares increased by 20% the next day. Trading before the market opened on September 10 would have offered an investor a better chance at a lower entry price.

Following company results announcements, such as the one above, market activity and price fluctuations tend to spike. Investors can use data from changes that affect a company’s value, such as changes in cash flows or predicted growth, to make effective trades. Positive earnings that boost a company’s intrinsic value may result in a stock price gain, whilst lower-than-expected earnings may result in a stock price decrease.

“Investors can profit from these specific events by entering or exiting a position in the extended-hours market with the expectation of being the first to act on these developments,” argues Denier.

Earnings are an important factor to consider for long-term investors. Investors that have been following a company for a long time may be able to predict earnings results and make market judgments based on their expectations in the run-up to these announcements.

Index futures

The futures market allows players to trade an item for a set price and delivery date in the future. This allows businesses to manage risk and market volatility.

A futures contract enables market participants to lock in a fixed asset price as a hedge against price swings. Futures are a global market that trades 24 hours a day, seven days a week. International market movements can be reflected in the increase or decline in stock index futures as shares are purchased and sold around the world.

The performance of an underlying index, such as the S& P 500, Nasdaq Composite, or Dow Jones Industrial Average, is tracked by index futures. The performance of the underlying index is used to value futures contracts. Investors can use index futures to predict whether the price of an index’s equities will rise or fall.

The futures market, according to Lloyd, is quite good at forecasting how people would react to news or economic data.

“If you’re a day trader, the futures market can assist you in predicting the stock market’s daily direction as well as the strength of the momentum. As a day trader, you must be able to determine the market’s or particular firms’ momentum “he proclaims

Long-term investors, on the other hand, do not need to follow the futures market daily and, according to Lloyd, “should take futures with a grain of salt” because they have a longer time horizon.

“Cash open during regular market hours counts substantially more to long-term investors than futures price activity,” he argues.

Experienced traders, on the other hand, may be able to profit from market volatility by buying and selling.

Traders and investors can utilize futures to speculate on the direction of stock prices and overall index performance. Because prices are subject to fluctuation, speculation can be a risky method of managing investments, but the upside, if a trader succeeds, can result in massive profits.

If I buy a stock after hours what price do I get?

On secondary exchanges known as electronic communications networks, stocks can be bought and sold 24 hours a day. While having the ability to trade stocks at any time is advantageous, investors must tread carefully in the potentially dangerous seas of after-hours trading. Several factors influence the price you pay and whether you can buy the stock you want on an ECN.

Regular versus After-hours

The New York Stock Exchange and NASDAQ, for example, are open from 9:30 a.m. to 4 p.m. EST. After-hours trading refers to any trading that occurs outside of these hours and takes place on ECN micro exchanges. While the Securities and Exchange Commission monitors these exchanges for fairness, fewer investors purchase and sell stocks after business hours. The majority of deals by large institutional investors, such as pension funds and insurance firms, are completed during regular business hours.

Liquidity

The ease with which you can buy and sell something is referred to as “liquidity” in finance. Liquid securities can be bought and traded rapidly and readily for a low price. Other securities are more time-consuming to trade and have greater fees. The “bid-ask” spread is one approach to gauge liquidity. “Bid” refers to the price at which the most motivated buyer is willing to purchase, whereas “ask” refers to the price at which the most willing seller is willing to sell. If the bid-ask spread on a stock is “$9.2-$9.3,” you can sell it for $9.2 right away but must spend $9.3 to purchase it.

Higher spread

In general, the narrower the spread, the more buyers and sellers are actively trading a stock. After-hours trading has bigger spreads, so you’ll probably pay more for shares than during regular trading hours. If you observe a huge spread and think it may narrow, keep an eye on the ECNs until the next morning to see if you can get a better bargain.

Limit orders

When purchasing shares, you can utilize one of two forms of stock orders. A market order instructs your broker to buy at the best available price, regardless of the price. A limit order sets the maximum amount you are willing to pay for anything. You won’t be able to buy shares if the broker can’t find them at or below that price. Limit orders are a good idea to utilize during after-hours trading. If you utilize a market order, the price at which you see a willing seller offering shares can vary in seconds, so you could end up paying substantially more.

FAQs

Should I trade after hours or wait for the regular trading session?

It all relies on your risk tolerance, trading strategy, and whether you’re entering or exiting a position. The average investor may prefer to wait until the regular trading session, but an experienced trader may use the after-hours market to terminate a losing position or get a head start on starting a new one. Make sure you understand the hazards of trading after hours and whether the benefits outweigh the risks in your particular scenario.

Is it too risky to trade in the after-hours market?

It all comes down to the investor’s particular tastes and risk tolerance. Lower volumes and wider bid-ask spreads are more than offset by the ability to act on new information before the next day’s regular trading session, as well as the chance to trade mispriced assets, according to seasoned traders.

When can you trade after hours?

Most transactions take place between 4 and 8 p.m. However, the largest majority of after-hours trading occurs between 4 and 6 p.m., so be particularly cautious if you want to trade in the final hour or two of the session.

Does Robinhood allow after-hours trading?

Yes, Robinhood allows after-hours trading on its platform.

Can I use a market order to trade stock after hours?

In after-hours trading, a market order cannot be used. During after-hours trading, most brokerage firms only allow limit orders to protect investors against unexpectedly unfavorable prices caused by reduced trading volumes and wider spreads.

Market hours schedule

NYSE (Tape A)

  • Pre Opening: Monday through Friday, 6:30 a.m. ET
  • Standard trading: Monday through Friday, 9:30 a.m. to 4 p.m. ET

NYSE (Tapes B and C)

  • Pre Opening: Monday through Friday, 6:30 a.m. ET
  • Early trading: Monday through Friday, 7 a.m. to 9:30 a.m. ET
  • Standard trading: Monday through Friday, 9:30 a.m. to 4 p.m. ET

NYSE American equities, NYSE Chicago, NYSE National

  • Pre Opening: Monday through Friday, 6:30 a.m. ET
  • Early trading: Monday through Friday, 7 a.m. to 9:30 a.m. ET
  • Standard trading: Monday through Friday, 9:30 a.m. to 4 p.m. ET
  • Late trading: Monday through Friday, 4 p.m. to 8 p.m. ET

NYSE Arca Equities

  • Pre Opening: Monday through Friday, 3:30 a.m. ET
  • Early trading: Monday through Friday, 4 a.m. to 9:30 a.m. ET
  • Standard trading: Monday through Friday, 9:30 a.m. to 4 p.m. ET
  • Late trading: Monday through Friday, 4 p.m. to 8 p.m. ET

Nasdaq stock exchange

  • Early trading: Monday through Friday, 4 a.m. to 9:30 a.m. ET
  • Standard trading: Monday through Friday, 9:30 a.m. to 4 p.m. ET
  • Late trading: Monday through Friday, 4 p.m. to 8 p.m. ET

U.S. stock exchange holidays

U.S. markets are closed on the following days:

  • New Year’s Day
  • Martin Luther King Jr. Day
  • Presidents Day
  • Good Friday
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Christmas Day

U.S. stock exchange shortened trading days

The U.S. stock exchanges have shortened trading days and closed early on the following days:

  • Black Friday (the day after Thanksgiving): 9:30 a.m. to 1 p.m. ET
  • Christmas Eve: 9:30 a.m. to 1 p.m. ET

The bottom line

Between 4 p.m. and 8 p.m., after the market closes and 4 a.m. and 9:30 a.m. before the market opens, after-hours trading takes place. However, each brokerage has its own set of restrictions for trading outside of normal market hours. Trading after hours allows investors to react swiftly to breaking news, but it comes at the cost of heightened volatility and lower volumes.

Although participating in after-hours markets can benefit investors and traders, there are significant risks involved. Anyone who engages in after-hours market activities should be aware of the dangers.