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.
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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 0.1%) 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
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.
FAQs
However, after-hours price changes are often more volatile than regular-hours prices, so they should not be relied on as an accurate reflection of where a stock will trade when the next regular session opens.
How does the after-hours trading work? ›
After-hours trading is exactly what it sounds like: trading that takes place once the stock market closes for the day, which in the U.S. happens at 4 p.m. Eastern time. Similarly, for early birds, there is a trading session before the market opens at 9:30 a.m. Eastern, called premarket trading.
Who trades at 4am? ›
The Nasdaq and other major stock exchanges have steadily augmented their trading hours to provide investors with more time to buy and sell securities. Nasdaq's pre-market operations let investors start trading at 4 a.m. Eastern time.
Does after-hours trading affect opening prices? ›
After-hours trading can have a significant impact on stock prices. Price volatility can be more pronounced during after-market trading due to lower volumes. If a company releases strong earnings after the market closes, its stock price may surge in after-hours trading as investors react to the news.
Why is after-hours trading risky? ›
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.
Can you make money in after-hours trading? ›
The development of after-hours trading offers investors the possibility of substantial gains, but you should also be aware of some of the inherent risks and dangers that come with investing during this time. These include: Less liquidity: There are far more buyers and sellers during regular hours.
Do after-hours trades count as day trades? ›
All trading activity is included in calculating your prior day's closing equity value. This includes any extended-hours trading and transfer activity up until 8 PM ET. However, positions are valued based on their 4 PM ET closing price.
Is after-hours trading illegal? ›
Yes. After-hours trading allows for stocks to be traded after the stock market's regular hours. However, investors should be prepared for their orders to not be filled as quickly (or even at all) due to the lower trading volume during these extended market hours.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the best hour to trade? ›
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
The ideal time for intraday trading, according to stock market analysts, is between 10.15 a.m. and 2.30 p.m. This is because by 10.00 a.m. to 10.15 a.m., morning stock volatility has subsided. As a result, it is the ideal opportunity to place an intraday transaction.
Is after-hours trading worth it? ›
There are several potential benefits for after-hours trading: Convenience: Some traders simply can't place trades during the normal session due to their schedules. The after-hours session allows them to check out the current quotes and potentially place a trade at a more convenient time.
Why does stock price go up after hours? ›
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.
What brokers allow after-hours trading? ›
Best brokers for after-hours trading and pre-market trading
- Fidelity Investments: Fidelity offers extended hours from 7 am to 9:30 am and from 4 pm to 8 pm.
- Merrill Edge: Merrill Edge offers extended hours from 7 am to 9:30 am and from 4 pm to 8 pm.
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- ...
Which time frame is best for indicators? ›
Indicators can be used on all time frames, and for the most part, they have variables that can be adjusted to suit each trader's specific preferences. Traders can combine indicator strategies–or come up with their own guidelines–so entry and exit criteria are clearly established for trades.
What is the most effective indicator for day trading? ›
7 best indicators for day trading
- MACD.
- Relative Strength Index.
- Stochastic Oscillator.
- Bollinger Bands.
- On Balance Volume.
- Average Directional Index.
- PSAR.
Trading at the Opening of the Market
Hence, this makes the time frame between 9:30 am to 10:30 am the ideal time to make trades. Intraday trading in the first few hours of the market opening has many benefits: – The first hour is usually the most volatile, providing ample opportunity to make the best trades of the day.
