What is after-hours trading?
What is after-hours trading?
After-hours trading takes place after the trading day for a stock exchange. It allows you to buy or sell stocks outside of normal trading hours. Typical after-hours trading hours in the U.S. are between 4 p.m. and 8 p.m. Eastern Time.
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Trading outside of normal hours used to be limited to institutional investors and high-net-worth individuals. Today, technology has made it possible for the average investor to place orders for after-hours execution.
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High Net-Worth Individual (HNWI)
People who have amassed investable (or liquid) assets of $1 million or more.
After-hours trading allows investors to react to company earnings releases and other news that typically takes place before or after normal trading hours. Prices can swing wildly on an earnings release or news that a CEO is stepping down. If you want to buy or sell as soon as possible based on the news, you'll need to place an order for after-hours trading.
How after-hours trading works
How after-hours trading works
After-hours trading is a bit different from regular trading on the exchanges throughout the day. Instead of placing your order on the exchange, your order goes to an electronic communication network, or ECN. That presents some limitations and additional risks compared to regular trading on the Nasdaq or the New York Stock Exchange.
Most notably, investors can only use limit orders to buy or sell shares. The ECN matches orders based on limit prices. Additionally, after-hours orders are only good for that session. You'll have to put in another order when trading opens the next day if you're still interested in the stock.
To execute an after-hours trade, you log in to your brokerage account and select the stock you want to buy. You then place a limit order similar to how you'd place a limit order during a normal trading session. Your broker may charge extra fees for after-hours trading, but many don't (be sure to check).
Your broker then sends your order to the ECN it uses for after-hours trading. The ECN attempts to match your order to a corresponding buy or sell order on the network.
Example of after-hours trading
Example of after-hours trading
You might want to make an after-hours trade on a stock when it releases significant news after the market closes.
Let's say Apple (AAPL 2.86%) reported its quarterly earnings after the market closed for the day. The market initially read the report as negative. However, you think it's overreacting, and you believe the long-term prospects for Apple remain strong.
Log into your brokerage account and place a limit order to buy 100 Apple shares at $180 each. The broker will send that order to its ECN, where it will look for an order or combination of orders to sell at least 100 Apple shares at $180 or less. If it can match your order, the trade is executed, and settlement times are the same as during regular sessions.
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Risks of after-hours trading
Risks of after-hours trading
After-hours trading comes with several risks not associated with trading on an exchange during regular trading sessions.
- Pricing risk: There are multiple ECNs used by different financial institutions to execute after-hours trades, but you'll only get access to one of them through your broker. During a normal trading session, you'll get the best available price from multiple venues. But after-hours sessions limit your price discovery to just one network.
- Liquidity risk: Not only are you limited to the ECN your broker uses, there are fewer market participants in after-hours sessions. As a result, there's limited liquidity for most stocks. That creates wider bid-ask spreads and an increased risk that your order won't get executed.
- Volatility:When everyone's trying to react to a news item all at once, a stock will trade wildly in the after-hours session. The market will work to digest the news and discover a new price for the security. That can make it difficult for an average investor to judge whether their limit order will have a good chance of execution. Also, you may be able to get a better price in the regular trading session the next day.
The bottom line is that after-hours trading is possible and can help you react to earnings reports and other news that takes place outside of normal market hours. However, each brokerage is a little different, so be sure to do your homework before getting started.
FAQs about after-hours trading
FAQs about after-hours trading
Who can trade after hours?
While after-hours trading used to be limited to institutional investors, most people have access to after-hours trading these days. The only requirement is a broker that supports it.
Is after-hours trading the same as day trading?
No. After-hours trading involves placing an order to buy or sell securities outside of normal trading hours. Day trading is the act of buying and selling a security within the same trading day.
Why do stocks spike after hours?
A stock will spike after hours when there's significant news released that affects how the market values the stock. Most big after-hours stock price movement is the result of a company releasing its quarterly earnings results.
Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
FAQs
After-hours trading refers to trading in stocks and exchange-traded funds (ETFs) that occurs after the regular market closes. It allows investors to buy and sell securities outside of normal trading hours for a variety of purposes, including responding to news or data releases that occur after the close.
Is after-hours trading accurate? ›
After-hours trading can have a significant impact on stock prices. Price volatility can be more pronounced during after-market trading due to lower volumes. If a company releases strong earnings after the market closes, its stock price may surge in after-hours trading as investors react to the news.
How do stocks move so much after hours? ›
During after-hours trading, there's less of a market for any stock being traded. This can lead to higher price volatility and lower liquidity, which can increase risk.
What are the worst months for the stock market? ›
Here is a summary of the NYSE Composite's best and worst months over the last 20 years (2004-2023)
- Best Months: April, July, October, November, and December.
- Worst Months: January, February, June, August, September.
The development of after-hours trading offers investors the possibility of substantial gains, but you should also be aware of some of the inherent risks and dangers that come with investing during this time. These include: Less liquidity: There are far more buyers and sellers during regular hours.
Does it cost extra to trade after hours? ›
Your broker may charge extra fees for after-hours trading, but many don't (be sure to check). Your broker then sends your order to the ECN it uses for after-hours trading. The ECN attempts to match your order to a corresponding buy or sell order on the network.
Does Charles Schwab allow after-hours trading? ›
At Schwab, clients can place orders for after-market trading and execution between 4:05 and 8 p.m. ET. Commissions and settlement times are the same as for the regular session. There are, though, several differences between regular session trading and after-hours trading.
Why can't I trade after hours? ›
It may be more difficult to transact after-hours because there are fewer investors trading during these periods. Typically there is lower volume and less liquidity. The spread between the bid and ask prices are often wider in after-hours trading than during regular trading hours.
What is the best time of day to buy stocks? ›
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
Which brokers allow after-hours trading? ›
Best brokers for after-hours trading and pre-market trading
- Fidelity Investments: Fidelity offers extended hours from 7 am to 9:30 am and from 4 pm to 8 pm.
- Merrill Edge: Merrill Edge offers extended hours from 7 am to 9:30 am and from 4 pm to 8 pm.
This price volatility may be temporary as the market may capture spikes in price to resolve liquidity shortages of securities once regular trading hours have opened. After-hours trading may also affect a stock price if the company has also released important news or earnings after the market has closed.
Does Fidelity allow after-hours trading? ›
Fidelity offers after-hours trading capabilities to its customers, allowing them to trade in the extended hours market. Investors can take advantage of this additional time to manage their portfolios, react to news, and adjust their positions based on after-hours price movements.
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the 3-5-7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
What happens if you sell stock after hours? ›
The major risks of after-hours trading are: Low liquidity. Trade volume is much lower after business hours, which means you won't be able to buy and sell as easily, and prices are more volatile. Wide bid-ask spreads.
How does overnight trading work? ›
Overnight trading refers to trades that are placed after an exchange's close and before its open. Overnight trading hours can vary based on the type of exchange on which an investor seeks to conduct trades. Overnight trading is an extension of after-hours trading (also known as extended-hours trading).
Can you close a trade when the market is closed? ›
A position can be closed only when the market you are trading is open. If you click the 'Close' button when the market is closed (for example, during weekends or market breaks), this will create an order to close the trade when the market re-opens. The position line will show 'Pending Close' until the market re-opens.
How does 24 hour trading work on Robinhood? ›
24 Hour Market lets customers invest when they want, on their schedule. Trading hours run from 8:00 pm ET on Sunday to 8:00 pm ET on Friday. Here's how to access the Robinhood 24 Hour Market in-app: Select your stock or ETF.
