After Hours Trading Explained

Published Wednesday, September 14, 2022 by

After Hours Trading Explained

What is After Hours Trading?

After-hours trading (some times abbreviated as AHT) refers to buying or selling securities outside of the standard trading hours. Each exchange has their own official trading hours. For the two largest stock markets, the NYSE and the NASDAQ, standard trading hours are from 9:30 AM to 4:00 PM.

Pre-market trading is very similar to After-Market Trading. Both terms refer to trading stock outside of the normal day session. Pre-market trading is in the morning before markets open while after-hours trading is in the evening.

Pre-Market Trading and After-Hours Trading are sometimes referred to jointly as Extended-Hours Trading. In the context of extended-hours trading, the normal trading hours are referred to as the day session.

When Does After-hours Trading Take Place?

For the New York Stock Exchange and the NASDAQ Exchange, after-hours trading is from 4:15 PM to 8:00 PM Easter Standard Time (EST) following regular trading hours which end at 4:00 PM. Pre-market activity is from 4:15 AM to 9:30 AM EST. Regular trading on these exchanges begins promptly at 9:30 AM.

Exact after-hours and pre-market trading times vary market-to-market, but the times are typically 3 to 4 hours before and after standard trading times.

Learn More: Real-Time Stock Market Countdown

Why does After-hours Trading Exist?

Extended-hours trading (which includes both pre-market and after-hours trading) began around 1999 when major stock exchanges introduced Electronic Communication Networks (ECNs) which allowed investors to trade securities electronically. Investors no longer needed to be on the stock market floor to place a trade.

In theory, investors should be able to trade shares directly with one another at any time. However, in practice, limited liquidity in AHT cause problems. ECNs help to reduce this problem, but do not completely alleviate the issue.

Some third-party ECNs exist that allow you to trade securities outside of major exchanges like NYSE or NASDAQ. These third-party exchanges are limited in size and the largest third-party ECNs have been acquired by the major exchanges.

How to Trading Stocks After Markets Close?

Can anyone participate in after-hours trading? Pre-market and after-hours trading where once reserved for large institutional investors and the wealthy, but not any more. Since the introduction of Electronic Communication Networks (ECNs), the stock market has become more accessible to everyone. ECNs mean you no longer have to be physically on the market floor to trade securities.

How to Trade After-hours?

Most major online stock brokers such as TD Ameritrade, Fidelity, and Vanguard will allow you to place trade orders to be executed during extended hours. Some may charge and additional fee for the service. You will have to check with your broker for details.

After-hours trading carries some big risks. Read on before starting to trade during extended-hours yourself.

What is the Risk of Extended-Hours Trading?

Lower liquidity means there are fewer buyers and sellers and a lower trading volume during AHT. This makes it harder to convert shares into cash. Lower liquidity also results in a wider spread between the bid and the asking price. In practice this means it will be harder to have a trade executed as a favorable price. You will have to move farther from your bid price in order to secure a trade.

Large institutional investors make up the majority buyers and sellers in the extended-hours market. Although extended-hours trading is now an option for all investors, even small fish, the reality is that the AHT market is mostly made up of large investors. These large institutional investors have access to more resources than most investors. This is the same risk day-traders and small independent investors face on a daily basis, but the effects are more exaggerated in the AHT market.

Higher volatility also results due to the low trading volume compared to during the day session. Because there are fewer trades happening, you are more likely to experience large, unexpected price shifts than during normal trading hours.

News Announcements such as earnings reports are usually released after the day session ends. US Employment Reports are released early before markets open. This news can have large, unexpected effects on a stocks price especially when combined with the effects of lower liquidity and higher volatility as described above.

Extended-Hours Trading Wrap-Up

After-hours trading is not for the faint of heart. The risks are real but the advantage is that you can make trades based on new information without waiting until the markets reopen. With the introduction of Electronic Communication Networks into the stock market, extended-hours trading is now available to everyone – not just large institutional investors.

Check out the Stock Market Countdown to see when markets open or click here for the Asian Stock Market Countdown!

Have a suggestion?
If you have anything you'd like us to add to the article, let us know.