After-Hours Trading: How It Works, Advantages, Risks, Example
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What Is After-Hours Trading?
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 in the after hours is conducted through electronic communication networks (ECNs).
Key Takeaways
- After-hours trading starts once the the day’s normal trading session closes at 4 p.m. and ends at around 8 p.m.
- Premarket trading sessions are also available to investors, generally from 7 a.m. to 9:25 a.m.
- After-hours trading and premarket trading is referred to as extended-hours trading.
- Advantages of after-hours trading include convenience and opportunity.
- Risks include low liquidity, wide bid-ask spreads, and order restrictions.
What’s After-Hours Trading?
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 as a result of 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 that takes place after normal market hours and up until about 8 pm. Premarket trading refers to trading that takes place 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.
After-hours trading typically only allows limit orders to buy, sell, or short, although a particular brokerage may be less restrictive. No stop, stop-limit, or orders with special instructions (such as fill or kill or all or none) are accepted. Moreover, orders are normally only good for the after-hours trading session in which they’re placed.
The maximum share amount per order is 25,000.
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.
Volume
In after-hours trading, the trading volume for a stock may spike on the initial release of news but most of the time 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
Not only does volume sometimes come at a premium in the after-hours trading sessions, so does price. It is not unusual for the spreads to be wide in the after-hours. The spread is the difference between the bid and the ask prices. Due to fewer shares trading, the spread may be significantly wider than during the normal trading session.
Participation
If liquidity and prices weren’t enough to make after-hours trading risky, the lack of participants may do the trick. That’s why certain investors and institutions may choose not to participate in after-hours trading, regardless of news or events.
It’s quite possible for a stock to fall sharply in the after hours only to rise once the regular trading session resumes the next day at 9:30 a.m. Many big institutional investors have a certain view of price action during after-hours trading sessions and express that view with their trades once the regular market re-opens.
Since volume is thin and spreads are wide in after-hours trading, it is much easier to push prices higher or lower. Fewer shares and trades are needed to make a substantial impact on a stock’s price. That’s why after-hours orders usually are restricted to limit orders. If your brokerage doesn’t restrict them, consider them anyway as a means to protect yourself from unexpected price swings and order fills.
Standard Trading vs. After-Hours Trading
| Standard Trading | After-Hours Trading |
|---|---|
| Orders placed anytime and executed from 9:30 a.m. to 4 p.m. ET. | Orders placed and possibly executed after 4 p.m. through 8 p.m. |
| Takes place on stock exchanges and Nasdaq via market makers and ECNs | Takes place via ECNs |
| No limit on order size | 25,000 share maximum order size |
| No restrictions on order type | Orders normally restricted to limit orders |
| Orders can carry over to subsequent sessions | Orders normally expire in same trading session they’re placed |
| Wide variety of securities traded (stocks, options, bonds, mutual funds, ETFs) | Most listed and Nasdaq securities are available |
| Large volume, greater liquidity = executed trades | Orders may not get filled due to lower liquidity |
Advantages of After-Hours Trading
The ability to place trades and have them filled in trading sessions that occur after normal stock exchange business hours can be important to some traders and investors. After-hours trading offers certain advantages.
Opportunity
Investors get the opportunity to trade on news that can move markets that’s released after the market closes or before it opens, such as the monthly jobs report or earnings reports. In addition, investors can take positions in response to unexpected events they believe may push prices higher (or lower).
After-hours trading may be an advantage to a dividend stock investor who misses the chance to buy a stock during regular market hours on the day before the ex-dividend date. The investor could try to buy it in after-hours trading in time to be eligible for the dividend.
Convenience
For any number of reasons, traders and investors may seek to trade after hours. For example, they may be occupied from 9:30 a.m. to 4 p.m. but still want to trade. Or, it might be part of a trading strategy to either take or close out positions when participants are fewer.
If the electronic communication network (ECN) that you’re using for after-hours trading suddenly becomes unavailable for technical reasons, your broker may try to direct orders to other participating ECNs so that they can continue to be filled. If this isn’t possible, a broker may find it necessary to cancel all orders entered for the after-hours session.
Risks of After-Hours Trading
If you’re considering after-hours trading, it’s important that you understand the risks associated with it. Bear in mind, these are on top of the inherent risks of stock trading.
In fact, some brokerages require that investors accept the ECN user agreement and speak with their brokerage representative before they’re allowed to trade, so that they fully grasp and accept those risks. Here’s a rundown:
- Low liquidity: After-hours trading involves low volume trading. That means that investors may find it difficult (even impossible) to buy and sell stocks.
- Price uncertainty: You may not see or get filled at the best available price since the prices/quotes available during after-hours trading are those provided by, usually, one ECN. They aren’t the consolidation of the best available prices that occurs in normal trading sessions.
- Price volatility: Low liquidity results in volatile prices, which can make orders a challenge to fill.
- Wider than normal bid-ask spreads: These can indicate an illiquid security, which can be difficult to buy or sell.
- Competition: Professional traders abound in after-hours trading. This can spark volatility and the potential for greater than normal losses for less experienced investors.
- Restricted orders: Depending on the ECN and brokerage, after-hours trading may be restricted to limit orders, which may mean your trades go unfilled.
Example of After-Hours Trading
Nvidia Corp. (NVDA) earnings results in February 2019 are an excellent example of the challenge of after-hours trading and the dangers that come with it. Nvidia reported quarterly results on Feb. 14. The stock was greeted by a big jump in price, rising to nearly $169 from $154.50 in the 10 minutes following the news.
As the chart shows, volume was steady in the first 10 minutes and then dropped quickly after 4:30 p.m. During the first five minutes of trading, around 700,000 shares traded and the stock jumped nearly 6%. However, volume slowed materially with just 350,000 shares trading between 4:25 and 4:30. By 5 p.m., volume measured only 100,000 shares, while the stock was still trading around $165.
Image by Sabrina Jiang © Investopedia 2020
However, the next morning was a different story. When the market opened for normal trading, traders and investors had a chance to weigh in on Nvidia’s results. From 9:30 a.m. 9:35 a.m., nearly 2.3 million shares traded, more than three times the volume in the initial minutes of the previous day’s after-hours trading. The price dropped from $164 to $161.
The stock proceeded to trade lower throughout the rest of the day, closing at $157.20. That was just $3 higher than the previous day’s close. Moreover, it was a plummet from the nearly $15 increase made in the after-hours session. Sadly, nearly all of the after-hours gains made by investors during that session had evaporated.
Does After-Hours Trading Affect Opening Price?
It certainly can. Since a great deal of trading may be taking place after hours, prices of securities can change from their levels when the regular market previously closed.
Can You Actually Trade After Hours?
Yes, provided your brokerage authorizes you to do so. You’ll first want to make sure you clearly understand how after-hours trading works and the risks involved in it. Your brokerage may ask that you meet with a investment representative to make sure you know the difficulties posed by after-hours and premarket trading.
Why Can Stocks Be So Volatile in After-Hours Trading?
Lower trading volume and less liquidity results when fewer traders and investors are in the market. This causes wider bid-ask spreads and, in turn, greater stock price volatility. This is the challenging trading environment that can exist in after-hours trading.
The Bottom Line
After-hours trading of securities occurs after the close of the regular trading session at 4 p.m. ET and can last until about 8 p.m. ET. While it offers investors certain advantages, it also can be quite risky. So, in addition to understanding those risks, be sure to consider your investing goals, your tolerance for risk, and your trading style before getting involved.
Most investors may want to stick with the familiar buy and hold strategy that can be executed during normal trading sessions. However, for those prepared for it, after-hours trading may be a useful investment tool and worth trying out.
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