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
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 +0.87%) 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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