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.
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)
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.
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.
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