By Margaret Jackson
Copyright benzinga
Most of the trading of stocks happens weekdays during regular business hours, but news and events often occur after markets close, and investors want to react. After-hours trading gives them the opportunity to buy or sell shares without waiting until the next day.
In this guide, you’ll learn what after-hours trading is, how it works and its key risks and benefits.
How It Works
After-hours trading is the buying and selling of securities after the major U.S. stock exchanges, like the New York Stock Exchange and the Nasdaq Stock Market, close for the day.
Regular trading hours in the U.S. are from 9:30 a.m. to 4 p.m. Eastern Time, while the after-hours session starts at 4 p.m. and can last as late as 8 p.m. ET.
After-hours trading operates differently from the regular session. Instead of the traditional exchanges, trades are facilitated by electronic communication networks (ECNs). ECNs are automated systems that match buy and sell orders from participants, allowing transactions to occur without a live trading floor.
A key difference between trading during regular hours and after hours is that only limit orders are allowed. A limit order specifies a maximum price you’re willing to pay to buy a security or a minimum price you’re willing to accept to sell it. If you’re trading on the regular market, you can place a market order to buy or sell a security immediately at the best available price.
Risk and Potential Benefits
After-hours trading offers both risks and opportunities in a distinct market environment.
Lower liquidity and wider spreads: Fewer buyers and sellers are active after hours, which results in lower liquidity, making it harder to execute your order. The difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) can be wider than during regular hours, leading to less favorable prices for your trades.Higher volatility: Lower trading volume can lead to greater price swings. A small trade can cause a stock’s price to move dramatically, a risk that is largely absent during the regular trading session.Competition with professionals: After-hours trading is dominated by large institutional investors and professional traders who have access to more resources and information. Individual investors may be at a disadvantage competing against them.Uncertain prices: The price of a stock after hours may not accurately reflect its price at the end of the regular season or at the opening the next day. This can lead to “gapping,” where the opening price is significantly different from the previous day’s close.
Potential Benefits
Early access to news: Many companies, especially those from the tech sector, release their quarterly financial reports or other important news after the market closes. After-hours trading allows investors to react to the information immediately rather than waiting until the next morning.Convenience: After-hours trading provides flexibility to investors who are unable to monitor the markets or place trades during the regular workday.Ability to react to global events: International markets and global news can influence U.S. stock prices. After-hours trading allows investors to respond to these developments as they happen.
Practical Application of After-Hours Trading
Imagine it’s a Tuesday afternoon and Amazon is scheduled to report its quarterly results. The market closes at 4 p.m. ET, and at 4:15, the company announces that its earnings far exceeded analyst expectations.
In this scenario, a trader who believes the stock will rise can immediately place a limit order to buy shares in the after-hours session. The stock may see a rapid increase in price as other investors and institutions react to the positive news.
Without after-hours trading, the trader would have to wait until the next morning, when the market opens. By that time the stock’s price would have already factored in the good news and gapped up, potentially eliminating the opportunity for an early gain.
Weighing the Risks and Rewards
After-hours trading provides an avenue for investors to act on late-breaking news and market developments, but it comes with considerable risks, largely because of lower liquidity, wider bid-ask spreads and higher volatility.
For personal financial planning, engaging in after-hours trading requires awareness of all the risks. It’s not a good strategy for every investor, especially those with a low risk-tolerance.
Investors who want to participate in after-hours trading must also remember to use limit orders to protect themselves from getting an unfavorable price.
For most long-term and beginning investors, it’s best to stick to regular trading hours, where the market is more transparent, liquid and stable.
Frequently Asked Questions
