What is After-Hours Trading? How Does it Work?
When people think about the floor of the New York Stock Exchange one of the first images that comes to mind is probably the opening and closing bell that announces the start and finish of trading each day.
Typically, stock trading begins at 9:30 AM each weekday and ends at 4 PM, but now, investors can participate in after-hours trading, making transactions before or after the market opens or closes.
While this can be convenient for people who want to make portfolio moves outside normal business hours, it can be a complicated and risky process, so it’s only advisable to participate in after-hours trading if you’re an experienced trader and know what you’re doing.
This article will cover the basics of after-hours trading and how it works, so you can decide whether it’s the right choice for you.
What is After-Hours Trading?
After-hours trading is a special type of stock trading that occurs after the normal close of trading at 4 PM.
The after-hours trading session lasts from 4 PM to 8 PM.
There is also a pre-market trading session between 8 AM and 9:30 AM, when normal trading begins.
During extended trading hours, investors can buy and sell securities much like they can during normal trading hours.
In the past, extended trading hours were limited to wealthy and institutional investors, but recent technological advances have opened them more widely.
Today, many everyday investors can participate.
One thing to keep in mind is that there are far fewer people participating in trading outside of normal trading hours.
This means:
Securities are far less liquid.
During the day, millions of shares in many businesses may change hands. Typically, that leads to the difference between the highest buy price offered and the lowest sale price offered for a security to be very small, often a penny.
When liquidity is low, such as during after-hours trading, the spread between the buy and sale price may grow significantly.
Someone expecting to buy shares at one price might wind up paying for more than expected.
Lower liquidity can also result in higher price volatility than during normal trading hours.
Can You Buy Stocks on Weekends and Holidays?
Typically, you cannot buy stocks on weekends or holidays.
Once after-hours trading ends on a business day, trading doesn’t usually resume until pre-market trading the next business day.
There are some options for weekend trading, but the extreme lack of liquidity makes trading on the weekends generally difficult and risky.
International investors may have the chance to trade on weekends if they decide to make purchases using the correct stock exchange.
For example, time differences mean that some stock exchanges in Asia will be open on Sunday evenings in the United States.
Of course, trading stocks on a foreign stock exchange adds significant complications and difficulties to the process, so it’s only a good idea for highly-experienced investors.
How After-Hours Trading Works
How after-hours trading works will depend on the brokerage that you use.
In general, after-hours trading is just like trading during normal business hours, with the exception that the number of participants, and therefore liquidity, is much lower.
However, many brokerages add some additional stipulations to after-hours trading.
For example, your brokerage may make you meet certain requirements before participating in after-hours trading. You may also have to pay an additional fee for trades outside the normal hours.
Many brokerages also restrict the types of orders that investors can submit outside normal trading hours.
One of the most common types of orders is the market order.
When you place a market order to buy a stock, you simply tell your brokerage how many shares to purchase. The brokerage then buys them at the best available price. When the stock is highly liquid, this isn’t an issue because you’re likely to get a good price.
During after-hours trading, when stocks are less liquid, the spread between the best sell offer and the best buy offer might be large.
If you submit a market order, you may wind up paying far more than you expect, with no option to sell for anything but a significant loss.
This leads many brokerages to force investors to use limit orders during after-hours trading.
With a limit order, you specify the number of shares to buy or sell and the worst price you’re willing to accept.
The brokerage fulfills the order if possible but won’t buy for more or sell for less than the price you enter.
Brokerages also typically prevent investors from using more complex orders, such as stop orders during after-hours trading.
Who is Allowed to Trade After-Hours?
While after-hours trading used to be the domain of the wealthy and institutional investors, today, almost anyone can place orders outside normal trading hours.
Each brokerage can decide to offer after-hours trading to its customers. If you want to participate, all you have to do is select a brokerage that offers the option.
Make sure to consider other factors, such as the commissions charged, and other services the brokerage provides, before selecting a brokerage to work with.
Risks of After-Hours Trading
After-hours trading can be risky.
Again:
There are far fewer people participating in the market outside normal trading hours, which reduces liquidity.
You may struggle to find a fair buy or sell price when you want to make a transaction.
To make sure you don’t accidentally sell shares for too little or overpay for shares you want to buy, using limit orders is essential.
With a buy limit order, you specify the highest price you’re willing to pay. With a sell limit order, you specify the least you’ll accept to sell your shares. These types of orders can help you avoid significant losses.
Another risk is that after-hours trading is less popular with regular investors.
That means that individuals will be competing with large, institutional investors who have significant resources at their disposal.
These major players may have access to information that you don’t or learn about news more quickly, giving them a chance to make profitable moves before you have the opportunity.
Conclusion
After-hours trading lets you buy and sell stock outside of the normal 9:30 to 4 business hours, but it can be very risky to place orders when there are far fewer people participating in the market.
Trading before the market opens or after it closes is usually best left to advanced investors who know what they’re doing.
If you want to participate in after-hours trading, make sure you use limit orders and understand that the risks of after-hours trading may be higher than typical investing risks.
