The stock market may close at 4 p.m. Eastern Time (ET) but that doesn’t mean trading stops. After-hours trading, also known as post-market trading, allows investors to buy and sell stocks for an additional four hours, from 4 p.m. to 8 p.m. ET. This extended trading window can be advantageous for certain investors, but it also comes with unique risks.
In this guide we’ll explore the ins and outs of after-hours trading, including:
- What it is and how it works
- The benefits and drawbacks of trading after hours
- Who can participate in after-hours trading
- How to access after-hours trading
- FAQs about after-hours trading
What is After-Hours Trading and How Does it Work?
After-hours trading takes place on electronic communication networks (ECNs) instead of the traditional stock exchanges, These ECNs allow investors to buy and sell stocks without the need for market makers or brokers to be physically present,
When you place an order during after-hours trading, it is essentially placed in a queue and waits to be matched with another order. If no matching order is found, your order may not be executed.
Benefits of After-Hours Trading
- React to news and events: After-hours trading allows investors to react to news and events that occur after the market closes. For example, if a company releases a positive earnings report after hours, investors can buy the stock before the market opens the next day.
- Increased liquidity: While after-hours trading volume is lower than during regular trading hours, it can still be higher than in pre-market trading. This can make it easier to buy and sell stocks without significantly impacting the price.
- Start the T+3 settlement process: After-hours trades can begin the T+3 (trade plus three days) settlement process sooner than waiting until the next trading day. This can be beneficial for investors who need to access their funds quickly.
Risks of After-Hours Trading
- Increased volatility: After-hours trading is often more volatile than regular trading hours. This is because there are fewer buyers and sellers, which can make it easier for the price of a stock to move sharply in either direction.
- Lower liquidity: As mentioned above, after-hours trading volume is lower than during regular trading hours. This can make it difficult to buy or sell stocks at the desired price.
- Overnight risk: The market can change significantly overnight, which means that your after-hours trades could be profitable or unprofitable by the time the market opens the next day.
Who Can Trade After Hours?
After-hours trading is available to both institutional and retail investors. However, not all brokers offer after-hours trading, so it’s important to check with your broker before placing any orders.
How to Access After-Hours Trading
If your broker offers after-hours trading, you can access it through your online trading platform. Simply place your order as usual, and select the “after-hours” option.
FAQs about After-Hours Trading
Can I buy stocks after hours?
Yes, you can buy stocks after hours. However, it’s important to be aware of the risks involved.
When does after-hours trading start?
After-hours trading starts at 4 p.m. Eastern Time (ET).
When does after-hours trading end?
After-hours trading ends at 8 p.m. Eastern Time (ET).
Is after-hours trading risky?
After-hours trading can be more risky than regular trading hours due to increased volatility and lower liquidity.
Can I trade after hours at any brokerage?
No, not all brokers offer after-hours trading. You should check with your broker to see if they offer this service.
After-hours trading can be a useful tool for investors who want to react to news and events or who need to access their funds quickly. However, it’s important to be aware of the risks involved before placing any orders. If you’re considering after-hours trading, it’s best to consult with a financial advisor to discuss whether it’s right for you.
Potential benefits of extended hours trading
You can trade more easily, more conveniently, and with more access outside of regular market hours with extended hours trading.
Potential risks of extended hours trading
There may be large differences between the bid, which is the highest price offered by all buyers, and the ask, which is the lowest price offered by all sellers, because typically fewer shares trade after hours. Some stocks may simply not trade after hours. Low liquidity or volume spikes in either direction are possible during an overnight trading session.
The quotes you see during the regular session are consolidated and show the best prices that are offered by all trading venues. You might only see prices from one venue during extended hours trading sessions, and these prices might not match the prices shown in other electronic trading systems for the same security. Additionally, one or more foreign markets could open or close at any point during the session, which could have an immediate impact on prices.