What Is After-Hours Trading? Learn How It Works

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After-Hours Trading

A trading session covers the time frame during which stocks can be bought or sold. While most trades occur within standard business hours, the option for ‘after-hours’ trading exists too. However, the rules for after-hours trading are different, so you should learn about them and be careful if you plan to trade during this time.


What Is After-Hours Trading?

Investors can buy and sell stocks after the regular market hours through the after-hours trading session. The well-known trading markets like the NYSE and the Nasdaq are usually open from 9:30 a.m. to 4:00 p.m. on weekdays. However, after the operating hours, you can trade using electronic networks known as ECNs from 4:00 p.m. to 8:00 a.m.

Electronic Communication Networks or ECNs, are replacing the standard stock market and facilitate after-hours stock trading. Moreover, the current economic news might change the trading volume, and the spread is higher during this time.


Key Takeaways

  • After-hours trading is the act of buying and selling stocks outside of regular market hours.
  • ECNs can help buyers and sellers connect and make deals during this trading sessions.
  • Although this trading can make a profit, it also has its own risk.


How After-Hours Trading Works

Most investors know that major U.S. stock exchanges like the NYSE and Nasdaq operate only on weekdays, but trading happens after operating hours as well.

Previously, after-hours trading was mainly for the wealthy and big mutual funds, but the Electronic Communication Networks (ECNs) help smaller traders to trade during after-hours. However, people who are part of FINRA can choose to trade during these extended hours by following the rules set by the U.S. Securities and Exchange Commission’s or SEC.

However, we will guide you through three main keys directly affecting the working principle of this trading. It includes stock market sessions, participants, and stock price variation.

Stock Market Sessions

Stock trading isn’t confined to the workday from 9 a.m. to 5 p.m. It happens in three main time frames:

  • Pre-Market: This is the early bird phase, where you can trade from 4 a.m. until the market opens at 9:30 a.m.
  • Regular Market: This is your standard trading time, from 9:30 a.m. to 4 p.m., Monday through Friday.
  • After-Hours Market: Once the regular market closes, you can still trade from 4 p.m. to 8 p.m. ET.

⚠️Tip: You can buy or sell stocks at any agreeable price before the market opens or after it closes.

Participant in After-Hours Trading

ECNs can help both experienced and beginning traders to trade in after-hours trading. This is a step towards a future of 24/7 trading. Some popular brokers allow you to trade after regular hours, so you need to research and select the brokers that suit your goal.

When you trade after hours, you can only use limit orders because fewer people are active, so the bid-ask spread is often wider. However, using limit orders helps you avoid buying or selling at a bad price. Remember that there’s a risk when your order is not completed if the stocks don’t hit your set price.

Stock Prices Variations

Trading outside regular hours—known as pre- and post-market sessions—usually sees less activity, making it more volatile and less predictable. However, using limit orders can help you lock in the price you want.

Although a stock price changes after hours, it may not reflect what will happen when the market opens the next day. For example, a stock might spike after a glowing earnings report is released post-market. Moreover, when investors have more time to digest the info, they might not find it as impressive, and the stock could drop when the market reopens.

Essentially, after-hours price changes can show how the market reacts to news released outside regular trading hours. However, these price moves can be unstable and shouldn’t be seen as a reliable gauge of what a stock will do in the next regular trading session.


How to Trade during After-Hours Sessions

There are 6 steps on how to trade during after-hours sessions.

1. Choose a Broker

Before trading, make sure that you choose a broker who provides the trading services.

2. Use Limit Orders

You’ll need to set limit orders to specify the price you’re willing to buy or sell at. This helps you avoid getting a raw deal due to the volatile nature of after-hours trading.

3. Do Research

Doing some research can help you understand stocks, pending news, and their regular hours performance. It is helpful to consider before trading.

4. Be Cautious

After-hours trading comes with risks, like lower liquidity and higher volatility. Always weigh these against the potential benefits.

5. Stay Flexible

Keep in mind that stock prices can swing dramatically after hours. Moreover, it might not carry into the next trading day.

6. Opt-Out Option

When it seems to be risky to trade after regular hours, it will be better to trade during regular trading hours to avoid a risky situation.


Advantages & Risks of After-Hours Stock Trading

Although trading during after-hours has several advantages, it’s important to weigh certain potential risks before engaging in such trading activities.

Immediate Market Reaction

Take advantage of breaking news or financial reports after standard market hours. This timely action can often cause favorable trading conditions.

Flexibility

You’re not bound by the 9:30 a.m. to 4:00 p.m. ET window, but you can trade on your own time. This can particularly benefit people with other commitments during standard trading hours.

Potential for Gains

With fewer participants and less volume, traders can often find profit opportunities unavailable during regular market hours.

Strategic Planning

The extra time can be used for deeper analysis and to refine trading strategies without the noise of a full market.

Lower Liquidity

Reduced trading volumes make it harder to execute large orders without affecting the stock price, potentially leading to less favorable trading conditions.

High Volatility

With fewer participants, stock prices can fluctuate wildly in a short amount of time. This could amplify both gains and losses rapidly.

Wider Bid-Ask Spreads

The difference between what buyers are willing to pay (the “bid”) and what sellers are asking for (the “ask”) tends to be greater, making it more challenging to execute trades at your desired price.

Limited Order Types

In after-hours trading, you’re often restricted to using limit orders, not market orders. This means you specify the price you want to buy or sell. While it protects against unfavorable prices, your order may not be filled.

⚠️Tip: Remember, while after-hours trading offers opportunities, it also comes with risk, and it’s generally best suited for experienced investors.


Conclusion

Trading in the after-hours market depends on various factors like your risk tolerance and trading plan. While regular hours are more popular for investors, some use after-hours trading to manage their positions. Remember to make well-informed decisions because the potential for profit in the after-hours market usually comes with risks.


FAQs

1. What is after-hours trading?

After-hours trading is the buying and selling of financial instruments outside of the standard trading hours of a formal exchange. These activities occur over electronic communication networks (ECNs).

2. How does trading after-hours work?

It operates like standard trading, but there are some differences, such as lower liquidity and higher volatility. You place an order via your brokerage account, but the price may fluctuate more dramatically due to the lower volume of trades.

3. Is selling after-hours a day trade?

If you sell a stock in the after-hours that you bought earlier in the day, that would be classified as a day trade.

4. Is after-hours trading illegal?

After-hours trading is a legitimate and regulated activity. However, it does have risks, like lower liquidity and higher volatility.

5. Why do people trade after-hours?

People trade after-hours for various reasons, such as reacting to late-breaking news or finding it more convenient due to work schedules and time zones.


Related Articles:

Read more: Stocks

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