The vast majority of trading activity on the stock market happens during the normal trading session, which lasts from 9:30am to 4:00pm Eastern time on business days. However, you might notice a stock you own ends the trading session at one price and starts the next session with the stock up or down to a completely different price.
How does this happen? Isn’t trading closed once the session is over?
Not exactly! In fact, institutional investors have been active in stock trading after normal business hours for decades, and the trend is starting to pick up with the retail crowd too.
What Is After-Hours Trading?
Regular market hours are set by the two major stock exchanges in the United States, the Nasdaq and the New York Stock Exchange (NYSE). These exchanges will only facilitate trades between the hours of 9:30am and 4:00pm Eastern time.
However, trading doesn’t stop once normal market hours are over. Instead, there’s a large crowd of investors who make moves in the after-hours session, which starts at 4:00pm and ends at 8:00pm.
Investors also take advantage of extended hours, trading before normal market hours in a session that starts at 8:00am and ends at 9:30am. This session is known as the premarket trading session.
During these sessions, stocks aren’t traded on major exchanges the way they are in the general trading session. Instead, these trades are facilitated by electronic communications networks, or ECNs. More on these shortly.
The majority of traders in these sessions are institutions and high net worth investors, but the rise of availability of ECNs has made it possible for the average investor to get involved too.
If you notice the price of a stock has jumped or fallen drastically in the time between when the market closes one day and when the market opens the next, don’t worry. It’s perfectly normal for prices to change outside of normal market hours because trading continues in these extra sessions when the major exchanges are closed for the day.
Who Can Trade After Hours?
For decades, the after-hours market was only available to institutional investors and has long been a popular hot spot for mutual funds, hedge funds, and other deep-pocketed market participants. As recently as 1999, institutional investors were the only ones able to access these sessions.
The good news is that technology has changed the way people do just about everything, and investing is no different. Thanks to the invention of ECNs, individual investors now have a trading system that gives them the ability to make moves outside of normal trading hours.
ECNs are complex trading systems that match buyers and sellers without the need for a traditional stock exchange like the Nasdaq or NYSE. Like a traditional exchange, ECNs provide stock quote data surrounding bid and asking prices and facilitate trades once the buyer and seller agree on the deal.
So to put it simply, today anyone can trade after hours.
However, not all brokerages provide access to these sessions. If you want to trade in the after-hours or premarket sessions, you’ll need to choose a broker that makes it possible to do so. Some of the most popular brokers that offer access to extended trading hours include Charles Schwab, Fidelity, TD Ameritrade, Robinhood, Firstrade, and Webull.
What Order Types Are Accepted After Hours?
The order types available to you in after-hours sessions largely depend on what’s offered by your broker. While most brokers that offer after-hours services offer all the same types of orders they would during normal sessions, some restrict order types to the most basic, such as buy orders, sell orders, and limit orders only.
If there are specific types of orders you’ll need when you trade stocks, reach out to the broker you’re working with to make sure those order types are available in the after-hours and premarket sessions.
Pros & Cons of After-Hours Trading
Trading outside of regular trading hours comes with pros and cons that should be considered before you begin to participate.
After Hours Pros
There’s quite a bit to be excited about in the after-hours trading session. Some of the most exciting aspects of trading in the extended session include:
1. Catch the Gap
By taking part in the extended market activity, you’ll never be the victim of wide gaps between a stock’s closing price and its opening price. Because you’ll be active at all times trades can be made, you’ll be able to catch a falling stock before it hits the bottom or jump in on a rising stock before the institutions drive the price to its maximum.
2. Take Advantage of After-Hours Catalysts
When good news is released about a company, it has the potential to send its stock skyward. Conversely, bad news can send a stock tumbling like a penny dropped from the Empire State Building.
Unfortunately, the news that’s most likely to cause significant price fluctuations is generally released outside of normal trading hours. That can create a major problem for investors who only make trades during traditional trading sessions.
For example, when a publicly traded company schedules its earnings report, it will either schedule it to be released before the bell (before the market opens), or after the bell (after the market closes).
The contents of the company’s report can create big moves in its stock price — often while the earnings call is still in progress — as investors try to pile in or jump ship based on the news. By the opening bell of the next trading session, many investors have already made their move, which will be reflected by the stock’s new price at the open.
By taking part in the after-hours session, you’ll be able to make your trades as soon as the news is released, ditching a stock before its likely collapse or buying in before the masses realize the opportunity.
3. Trade After Work
The average investor doesn’t work on Wall Street, but rather is a normal person who typically has to work elsewhere to make a living. Making investments in a market that’s only open from 9:30am to 4:00pm when you’re working a 9-to-5 job is hardly convenient.
Before the after-hours session was available to the average investor, people had to find a way to invest on their lunch break or hire a professional to make their trades during the day for them. Today, ECNs give the average person the ability to trade outside the regular trading session, making investing far more convenient for people with limited availability during the workday.
After-Hours Cons
While there are plenty of perks that come with trading in extended hours, there are also some significant drawbacks that investors should consider before diving in:
1. Potentially Increased Cost
Because after-hours trading is facilitated by different means than trades made during a normal trading day, costs associated with trading may be higher. Make sure to read all documents provided by your broker to get an understanding of the fees you’ll be charged for taking part in the after-hours or premarket sessions.
2. Wider Spreads
The spread on a stock is the difference between its bid price and its ask price. These spreads are determined by market makers based on the liquidity of stocks. Stocks in high demand that are largely liquid are charged smaller fees by market makers, making spreads small.
Because there is much lower volume in after-hours sessions than during regular market hours, spreads increase, leading to higher costs represented as wider spreads.
Ultimately, with low demand and a lower liquidity, it is difficult for individual investors to buy in at low prices.
3. Heavy Volatility
The vast majority of investors who trade after hours are institutional and high net worth investors who often buy and sell large blocks of shares. When these large blocks hit the market, and a large institution is willing to sell to another, wide swings in stock prices happen.
So, while there’s lower trading volume in the extended session, the volume that does take place has the potential to move the needle in a big way, leading to a high volatility.
4. Delays
Finally, the technology used to process trades in after-hours and premarket sessions is very different from that of regular trading hours. In these extended sessions, trades are more delayed.
This can create a bit of a problem.
With fewer traders active in extended sessions, there are already fewer people out there willing to buy or sell shares. Add in lags and other delays in the processing of orders, and some of the orders you place in these after-hours sessions may not even go through.
Final Word
After-hours trading is simply the process of trading outside of the regular trading session hours. However, there’s far more to this type of trading than initially meets the eye.
While it may seem convenient to access the market after it closes, most retail investors are better off avoiding the process altogether.
After all, not only will you pay higher fees to make trades in extended sessions, but retail investors tend to find themselves in David and Goliath-style financial battles with big money institutions.
While there are benefits to being able to trade the news as soon as it’s released, high volatility, stiff competition, and added fees add to the general risks associated with investing and should be thoughtfully considered before you dive into after-hours trading.
As always, whether you’re trading in the normal or extended sessions, the foundation of profitable moves in the stock market is quality research. Always be sure to do your research before making any investments.
Source: moneycrashers.com