After-Hours Trading: Understanding How It Works

Every weekday at 9:30 a.m. EST, a bell signals the opening of the New York Stock Exchange and the beginning of the trading session that runs until 4 p.m. EST. This is the period when most trading activity takes place. However, advancements in technology have made the dream of a 24-hour stock market close to reality. Trades can still happen before the exchange opens and after it closes.

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After-Hours Trading: Quick Take

Outside of regular trading hours, investors can do extended hours trading. By engaging in after-hours trading, which includes both pre-market and after-hours trading, they can increase their time to buy and sell orders. Although after-hours trading is convenient, it’s also a type of trading that carries a special set of risks.

After-Hours Trading Schedule

What Is After-Hours Trading?

Although the vast majority of stock market trading is performed during traditional market hours, investors looking to buy or sell stock after the market closes might still be able to execute trades. Volume is typically light after the market closes for the day; if you’re looking to trade, you’ll generally have the best luck with large, liquid names. But some stocks don’t trade at all in the after-hours session.

How After-Hours Trading Works

The rules governing after-hours trading differ from regular session rules, so trades are limited. Traders can use limit orders, but orders with special conditions aren’t allowed. This means that buyers and sellers specify the price they’re willing to accept. The computer then searches for available buyers and sellers with matching price demands.

Just like during regular market hours, supply and demand rule the after-hours market. If there are more buyers than sellers in the after-hours session, stock prices will trend higher and vice versa. One indication of how the after-hours market is doing is the Nasdaq 100 after-hours indicator. This is similar to the live Nasdaq-100 index price you’ll see while the market is open.

After-hours trading does not necessarily affect a stock’s opening price at the next regular trading session. In fact, the opening price can look dramatically different from the prices seen in the electronic market. This is especially true if the market reacted to a company announcement or news headline that could potentially impact a business or industry.

Risks of After-Hours Trading

After-hours trading appeals to some investors because it’s convenient, but it’s not without its share of risk. Investors should educate themselves about the risks and benefits before attempting to execute trades.

One of the main benefits of trading during regular market hours is the liquidity it offers. As billions of shares of stocks trade hands every day during market hours, most stocks offer orderly trading patterns. This gives investors the ability to get into or out of a stock at the then-current price. In the after-market session, however, there are a few things to consider:

• Liquidity typically drops dramatically.

• There are fewer participants so stock price movements can be greatly exaggerated.

• A lack of liquidity makes it more difficult for investors to get their desired price.

• There can be difficulty in having the order executed.

• These trades can have higher volatility with wider spreads.

• Market-moving news announcements can be an issue.

• There is a lack of consolidated quotes in the after-market and might only see limited quotes, with higher prices available from other brokers.

• You’re also often competing with professional traders who tend to have more experience trading.

Final Take To GO

Keep in mind that after-hours trading can vary by broker. But as there are fewer participants trading during after-hours, the trading volume can be significantly less than the regular trading day. This lower volume often leads to a separation in the bid and ask prices, which is referred to as the wider bid-ask spread. Make sure you do your research and are aware of the advantages and also the risks involved when you are after-hours trading.

FAQ

Here are the answers to some of the most frequently asked questions regarding after-hours trading.

• Is it good to trade after hours?

  • For some trades, after-hours trading can be beneficial. Volume is typically light after the market closes for the day so you'll generally have the best luck with large, liquid names, though some stocks don't trade at all in the after-hours session.

• Can you buy stocks on the weekend?

  • It is possible to place orders to buy stocks on the weekend because the electronic market is open all the time. However, after-hours systems work by matching buyers and sellers who have similar price requirements. There is less activity in the market after the stock exchanges close, so you may not be able to find a stock available in your price range.

• How do after-hours trades work?

  • Outside of regular trading hours, investors can take advantage of both pre-market and after-hours trading. With these extended hours, you are able to buy and sell orders. Although after-hours trading is convenient, it's also a type of trading that carries a special set of risks.

• Why do stocks spike after hours?

  • If you follow financial news, you might notice that after-hours stock quotes are often different than the closing prices of stocks during regular market hours. This is due to investor activity in the after-hours trading market. Price changes that occur after-hours work in the same way as a price change that occurs during market hours. This means that a price change occurring at any time can affect the market and send investors clamoring to buy or sell specific stocks.

Caitlyn Moorhead contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: After-Hours Trading: Understanding How It Works