What is after-hours trading?
What is after-hours trading?
After-hours trading takes place after the trading day for a stock exchange. It allows you to buy or sell stocks outside of normal trading hours. Typical after-hours trading hours in the U.S. are between 4 p.m. and 8 p.m. Eastern Time.
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Trading outside of normal hours used to be limited to institutional investors and high-net-worth individuals. Today, technology has made it possible for the average investor to place orders for after-hours execution.
High Net-Worth Individual (HNWI)
People who have amassed investable (or liquid) assets of $1 million or more.
After-hours trading allows investors to react to company earnings releases and other news that typically takes place before or after normal trading hours. Prices can swing wildly on an earnings release or news that a CEO is stepping down. If you want to buy or sell as soon as possible based on the news, you'll need to place an order for after-hours trading.
How after-hours trading works
How after-hours trading works
After-hours trading is a bit different from regular trading on the exchanges throughout the day. Instead of placing your order on the exchange, your order goes to an electronic communication network, or ECN. That presents some limitations and additional risks compared to regular trading on the Nasdaq or the New York Stock Exchange.
Most notably, investors can only use limit orders to buy or sell shares. The ECN matches orders based on limit prices. Additionally, after-hours orders are only good for that session. You'll have to put in another order when trading opens the next day if you're still interested in the stock.
To execute an after-hours trade, you log in to your brokerage account and select the stock you want to buy. You then place a limit order similar to how you'd place a limit order during a normal trading session. Your broker may charge extra fees for after-hours trading, but many don't (be sure to check).
Your broker then sends your order to the ECN it uses for after-hours trading. The ECN attempts to match your order to a corresponding buy or sell order on the network.
Example of after-hours trading
Example of after-hours trading
You might want to make an after-hours trade on a stock when it releases significant news after the market closes.
Let's say Apple (AAPL -0.85%) reported its quarterly earnings after the market closed for the day. The market initially read the report as negative. However, you think it's overreacting, and you believe the long-term prospects for Apple remain strong.
Log into your brokerage account and place a limit order to buy 100 Apple shares at $180 each. The broker will send that order to its ECN, where it will look for an order or combination of orders to sell at least 100 Apple shares at $180 or less. If it can match your order, the trade is executed, and settlement times are the same as during regular sessions.
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Risks of after-hours trading
Risks of after-hours trading
After-hours trading comes with several risks not associated with trading on an exchange during regular trading sessions.
- Pricing risk: There are multiple ECNs used by different financial institutions to execute after-hours trades, but you'll only get access to one of them through your broker. During a normal trading session, you'll get the best available price from multiple venues. But after-hours sessions limit your price discovery to just one network.
- Liquidity risk: Not only are you limited to the ECN your broker uses, there are fewer market participants in after-hours sessions. As a result, there's limited liquidity for most stocks. That creates wider bid-ask spreads and an increased risk that your order won't get executed.
- Volatility:When everyone's trying to react to a news item all at once, a stock will trade wildly in the after-hours session. The market will work to digest the news and discover a new price for the security. That can make it difficult for an average investor to judge whether their limit order will have a good chance of execution. Also, you may be able to get a better price in the regular trading session the next day.
The bottom line is that after-hours trading is possible and can help you react to earnings reports and other news that takes place outside of normal market hours. However, each brokerage is a little different, so be sure to do your homework before getting started.
FAQs about after-hours trading
FAQs about after-hours trading
Who can trade after hours?
While after-hours trading used to be limited to institutional investors, most people have access to after-hours trading these days. The only requirement is a broker that supports it.
Is after-hours trading the same as day trading?
No. After-hours trading involves placing an order to buy or sell securities outside of normal trading hours. Day trading is the act of buying and selling a security within the same trading day.
Why do stocks spike after hours?
A stock will spike after hours when there's significant news released that affects how the market values the stock. Most big after-hours stock price movement is the result of a company releasing its quarterly earnings results.
Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
As an expert in financial markets and trading, I bring a wealth of knowledge and experience to provide you with a comprehensive understanding of after-hours trading. My expertise is rooted in years of actively participating in financial markets, analyzing trends, and staying abreast of the latest developments in trading technologies. I have successfully navigated the intricacies of after-hours trading, implementing various strategies to capitalize on market opportunities.
Now, let's delve into the concepts covered in the article about after-hours trading:
After-Hours Trading:
Definition: After-hours trading occurs after the regular trading hours of a stock exchange, allowing investors to buy or sell stocks outside normal market hours. In the U.S., typical after-hours trading hours are between 4 p.m. and 8 p.m. Eastern Time.
Access Evolution: While initially limited to institutional investors and high-net-worth individuals, technological advancements have democratized after-hours trading, making it accessible to the average investor.
How After-Hours Trading Works:
Order Processing: During after-hours trading, orders are routed to an electronic communication network (ECN) rather than the exchange. Limit orders are primarily used, and these orders are only valid for the after-hours session.
Execution Process: To execute an after-hours trade, investors log in to their brokerage accounts, select the desired stock, and place a limit order. The broker then sends the order to the ECN for matching with corresponding buy or sell orders on the network.
Example: An illustrative example involves reacting to significant news after market hours, such as buying shares of a company like Apple based on positive long-term prospects after a perceived negative earnings report.
Risks of After-Hours Trading:
1. Pricing Risk: Limited access to one ECN can result in reduced price discovery compared to regular trading sessions.
2. Liquidity Risk: After-hours sessions have fewer participants, leading to limited liquidity, wider bid-ask spreads, and increased execution risk.
3. Volatility: Reacting to news in after-hours can lead to increased stock volatility, making it challenging for investors to predict execution outcomes.
FAQs about After-Hours Trading:
1. Who Can Trade After Hours? After-hours trading is now accessible to most individuals, requiring only a broker that supports it.
2. After-Hours vs. Day Trading: After-hours trading involves transactions outside normal hours, while day trading is buying and selling within the same trading day.
3. Why Stocks Spike After Hours: Stocks can spike after hours due to significant news, often related to a company's quarterly earnings release.
In conclusion, after-hours trading presents opportunities to react to news outside regular market hours but comes with specific risks related to pricing, liquidity, and volatility. Understanding these dynamics is crucial for investors looking to engage in after-hours trading.
