Table of Contents
What is after-hours trading and how does it work?
What are the order types traded during after-hours sessions?
Potential benefits and risks of after-hours trading
The bottom line
Jun 21, 2022
5 min read
Trading volume is much lower in after-hours compared to the regular session, but the low volume also means that is highly volatile and can come with major price.
The stock market is made up of stock exchanges in countries all over the world, and most are open for regular trading sessions on weekdays during business hours in local time. For example, in the U.S., the New York Stock Exchange and the Nasdaq are open for regular trade Monday to Friday from 9:30 am to 4 pm Eastern time.
But can you buy and sell stocks after those hours or before the market opens? Absolutely. Many exchanges offer three sessions in total: pre-market trading, the regular trading day, and after-hours trading. Extended hours sessions offer both potential advantages and risks, and they operate a bit differently than the regular session.
In the U.S., the after-hours session runs for four hours after the market closes, from 4 pm to 8 pm Eastern time. This type of trading was once available mainly to institutional investors like big banks and high-net-worth individuals. But now, extended sessions have become more democratized and accessible to individual retail investors because of advances in technology—namely electronic communications networks (ECNs).
During the regular trading day, stock purchases are generally made with the help of an intermediary like an exchange market-maker that connects investors with major brokerage firms to make the deal. But extended-hours sessions rely on ECNs, which are computerized systems that connect buyers and sellers without needing a middleman. Many mainstream brokerages allow individual investors to participate in extended sessions through ECNs.
Here’s how it works: ECNs scan for the best available quotes for a given stock’s “bids,” the highest price a buyer is willing to pay for a certain number of shares, and “asks,” the lowest price a seller is willing to trade for. The bid is usually lower than the ask. When the system finds a match, it executes the deal.
In extended hours most of these transactions involve “limit orders,” which are orders to buy or sell a stock at a certain price or better. A buy limit order instructs that a purchase will be made if the stock reaches the specified price or lower, and a sell limit order is executed at the specified price or higher. That’s a different setup from market orders, which simply execute a trade as quickly as possible at whatever price the stock is selling for at that specific moment.
Limit orders allow market participants to keep a handle on their activity even in an automated system—because they’re guaranteed that orders are executed only if it’s at the limit prices they’re comfortable with. These orders are valid for only the current session, so if the ECN doesn’t find a match at a price the market participant wants, the order simply isn’t filled and no deal happens.
Buying stocks after hours comes with pros and cons compared with doing so during regular market hours.
The vast majority of trading happens during the regular session, but news can happen before or after the closing bell. For example, earnings reports are typically released early in the morning or later in the afternoon, before or after stock markets are open. And news like a product leak or executive shakeup can happen any time of day. Investors who participate in extended hours sessions get a chance to act on after-hours movers immediately, possibly many hours before the regular session begins.
Differences in time zones can work to investors’ advantages in a few ways. For one, big moves in, for example, the European and Asian markets may start shaking things up in the U.S. before the regular market in the U.S. opens. Again here, an investor trading during extended hours may have the chance to trade on these movements immediately. What’s more, investors might opt to trade the after-hours session in another part of the world when it’s a more convenient time of day for them in their time zone.
Because most activity happens during regular trading hours, the liquidity in the market is low during after-hours sessions. So individual deals can have an outsize effect on the market and prices may swing more than usual—giving participants opportunities for upside that they may not have had during the regular trading day.
Of course, the flip side of low trading activity and high volatility is that fast, sharp moves may not go an investor’s way. Not everyone can stomach the possibility of these large swings. What’s more, after-hours prices on low trading volumes may not ultimately reflect how the stock trades in the regular session the following day.
Although ECNs have made after-hours trading accessible to individuals, major players like big banks and pension funds are still plenty active in extended hours. They have far more resources to propose attractive pricing compared to an individual. Because there are fewer participants in after-hours trading, this competition looms larger than usual. And because there are fewer participants, this can edge retail investors out.
Most after-hours deals happen through limit orders, and the much smaller pool of participants means it can be tougher to find a match. Indeed, the “spread”—or difference—between the bid and ask is often higher in extended sessions. If a match can’t be made, the order expires and an investor may miss out on a trading opportunity.
Most stock exchanges around the world are open for regular sessions on weekdays during business hours in local time. But most also offer the opportunity to trade before, in what’s called pre-market trading, and after hours. It’s now easier for individual investors to participate in these extended sessions thanks to electronic communications networks, or ECNs, which automatically connect buyers and sellers without a middleman. These deals are typically executed through limit orders: A buy limit order means a purchase will be made only at the specified price or lower, while a sell limit order is executed at the specified price or higher.
Trading volume is much lower in after-hours compared to the regular session, which poses both potential advantages and disadvantages. For example, investors can immediately trade on early- or late-breaking news, getting a jump on others who won’t trade until the regular session. But the low volume also means after-hours trading is highly volatile and can come with major price swings that may not reflect the pricing during regular hours.
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