How Does After Hours Trading Work?

After hours trading is trading that takes place after the stock market closes for the day, typically between 4:00p.m. ET and 8:00 p.m. ET but can vary between broker.

Similarly, there is a trading session that occurs before the opening bell, which is referred to as the pre-market session. Both of these sessions are called extended-hours trading.

Trading stocks after regular business hours can offer convenience and other potential advantages. However, it comes with its unique rules, risks and restrictions that we’ve laid out below.

What is After Hours Trading?

The normal operating hours for trading stocks on the major U.S. stock exchanges are 9:30 a.m. ET to 4:00 p.m. ET. But investors can still buy and sell stocks and other securities during the after hours trading session.

This session technically starts at 4:00 p.m. ET after the close of major stock exchanges, and can run as late as 8:00 p.m. ET.

However, this is not a universal standard as brokerages such as Wells Fargo limit the session to a period from 4:05 p.m. ET to 5:00 p.m. ET while others like TD Ameritrade open the session at 4:15 p.m. ET.

Other brokerage firms such as E*Trade charge extra fees for after-hours trading. Therefore, it is imperative to have a look at the policies of your brokerage before trading after the close.

Placing orders during after hours occurs only through computerized trading systems known as electronic communications networks (ECNs).

These systems match potential sellers and buyers, and your buy trade can’t be completed until a sell order is placed at the price you want.

The Pros of Trading After the Close

The main advantage of buying and selling stocks during after hours trading is that it allows investors to react to news events that happen after 4:00 p.m. ET, including monthly jobs releases or earnings reports.

Many publicly-traded companies release their earnings reports once the regular session closes. This means that traders don’t have to wait for the stock market to open the following day in order to place their trades.

Trading after the close allows them to instantly place trades and avoid missing meaningful price moves.

This trading strategy is also convenient for some investors who aren’t able to buy or sell stocks during the regular session because of their schedules.

Stocks After Hours Trading

For investors interested in jumping into trades after the close, there are a number of things to look for. They include:

• High volume: When trading after hours, traders ought to look for stocks that have increased relative volume as high volume reduces liquidity risks. Increases in volume means you’ll be able to buy and sell easily.
• News catalyst: News catalysts can occur without warning. Analyst opinion releases or investigations into a company can cause price movement in the after hours sessions.
• Earnings reports: Companies release their earnings reports ahead of the opening bell and after the market close. Traders should monitor corporate earnings reports of companies announcing after the closing bell to find the best opportunities.

The Risks Involved with Trading After the Close

There are a couple of reasons why trading after hours can be a big risk for investors. One is that there are far fewer market participants during after hours trading session than there are during regular trading hours.

That means share prices can be more volatile during after hours, raising the chances that a trade will get burned by a market that unexpectedly changes direction or moves quickly in either direction.

It also means that it can be hard for traders to match their buy or sell orders at the price they would like.

Secondly, small investors eager to make a trade can fall into the trap of savvy investors who set ambitious prices on either side of the market during the session.

Experienced traders likely have more information, more practice and more money than you, which puts you at a disadvantage and them at an advantage.

Trading after business hours may also deprive traders of stop-loss orders.

These orders direct a broker to sell a stock when it falls to or below a certain price.

Generally, brokers only execute them during regular trading hours, meaning people who trade during after hours sessions may have no choice but to watch helplessly if the stock market turns against them.

But some brokerage firms usually execute this key protection against sudden price falls during after hours, so traders ought to check with their broker.

Lastly, orders are often at risk of not being executed since most brokers allow only limit orders during after hours trading.

Top Tips For Beginners

Before entering an after hours order, it is important to determine if it’d be more cost-effective to wait till the stock market opens for regular trade.

Secondly, traders should consider trimming their position size from what their would normally trade during normal trading hours in order to minimize the risk of huge losses.

You also need to know your brokerage firm determines your margin as some brokers use the last trade in the after hours session, while others normally use the 4 p.m. closing price.

Bottom Line

Trading during after hours session can be a challenging endeavor for some stock investors, but it can also grant investors the opportunity to respond to news and corporate earnings reports that are released after normal market hours.

However, you need to learn how to make extra accommodation for bigger price moves, increased spreads, and lower volume when trading after the close.

Having said that, it is best to avoid buying or selling stocks during this session if you’re not an experienced trader.