After-Hours Trading: Definition and How It Works
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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. The two combined make up extended-hours trading.
Why would you want to trade in the off-hours? You actually might not. Here are the details, complete with advantages, disadvantages and risks.
The mechanics of after-hours trading
Trading during extended hours takes place when the major exchanges are closed, so orders are placed through computerized trading systems, or electronic markets.
This system essentially matches buy and sell orders — if you’re after 50 shares of a stock for $50 a share, and there’s someone out there looking to unload that many shares at that price, you’ll be matched and your order will be filled. If the system can’t find a match, the order will be canceled or held until regular trading hours.
Because of the lower volume of orders, there are different rules for after-hours trading. These rules are typically set by brokers and include such matters as the hours trading is available and the order types allowed during those hours. For example, orders are often required to be limit orders, which means an order will be filled only at a certain price or better.
» Out of your element? Read the basics on how to buy a stock
Not all brokers offer after-hours trading, so if this is a feature you’re interested in, you’ll want to ask about it upfront.
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The pros, cons and risks of after-hours trading
The main advantage is clear: The stock market keeps pretty tight banker’s hours, and after-hours trading means you’re not limited to that window. It allows you to react to events that occur after 4 p.m. or before 9:30 a.m. Eastern, including earnings releases or monthly jobs reports.
The negatives here mostly have to do with the risks of this trading strategy, of which there are many. The stock market is inherently risky, of course, and by actively stock trading, you’re coming to terms with that risk. But after-hours trading both enhances the standard risks of the market and introduces additional risks.
The major risks of after-hours trading are:
Low liquidity. Trade volume is much lower after business hours, which means you won’t be able to buy and sell as easily, and prices are more volatile.
Wide bid-ask spreads. This piggybacks on the above: Because trading volume is low, you might see lower bids for your sell orders, meaning an order could go unfilled or it could be filled at a price below what you could have earned during normal hours.
Order restrictions. As mentioned above, most brokerage firms allow only limit orders during extended hours, which means your orders will be executed only if they are matched with a buyer or seller at the price you’ve set or better. That leaves your orders at risk of not being executed at all.
Bigger fish. Casual investors don’t often play in the after-hours pond; instead, it’s full of professional traders. These investors likely have more practice, more money and more information than you, which puts them at an advantage and you at a disadvantage.
» Learn more: What is premarket trading?
Should you trade after hours?
The short answer: Probably not, unless you’re putting up a small amount of money to test the after-hours waters, and you’re willing and able to lose it all.
In general, most stock investors are better off sticking to a simple buy-and-hold formula that involves picking a few companies or funds you believe in and staying in for the long haul — no after-hours work required.
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