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There’s a sizable market for after-hours trading, and it’s not for the faint of heart. The closing bell shuts the U.S. stock market at 4 p.m. Eastern time each day, but trading continues in other venues after the bell. After-hours trading comes with unique risks, although many investors use these extended hours as a key tool in their strategy.
What Is After-Hours Trading?
The stock market is open for regular trading from 9 a.m. to 4 p.m. Eastern time. During those hours, everyone from your neighbor to the world’s largest institutional investors buy and sell stocks in pursuit of their financial goals.
For some, however, the action doesn’t stop at 4 p.m. That’s when after-hours trading comes into play. This specific trading window enables investors to buy and sell stocks for four additional hours, from 4 p.m. to 8 p.m. Eastern time.
During regular market hours, brokers, dealers and market makers are on the floor of the stock exchange to handle the technical side of trading. During after-hours trading, however, trading is carried out through Electronic Communications Networks (ECNs).
These electronic networks enable investors to buy and sell stocks without the standard daytime market participants. When a trade is placed, transactions make their way through through the ECN to await fulfillment. In other words, sell transactions wait for buyers and buy transactions wait for sellers. When transactions match up, those orders are executed through the ECN.
Why Trade After Hours?
With the entire U.S. stock market ready for trading six and a half hours a day, five days a week, one might wonder why investors would wait until after the markets are closed to trade. Turns out, there are advantages and risks to getting into the after-hours trading game.
Advantages of After-Hours Trading
Many companies release their quarterly earnings reports after the close of trading. If a high-profile company discloses outstanding quarterly results, many investors could rush to buy the stock in after-hours trading to take advantage of the good results, rather than waiting until the next day.
Alternatively, a company might report terrible results, and owners of the stock might have sell order ready to go in order to avoid losses following the negative report. Some traders might even place a buy order in after-hours trading to try and capture shares at a lower price.
An investor might also quickly need liquidity and want to begin the T+3 (trade plus three days) settlement process as soon as possible. After-hours trading can start the T+3 clock sooner than the next trading day.
Risks of After-Hours Trading
Getting a head start on a particular stock’s news may sound like a proposition with no downside, but there are risks you need to consider.
Price volatility. As we’ve noted, news can quickly move a stock’s price in after-hours trading. So while you might think you’re getting a good price, you may find yourself on the losing end of your trades if markets quickly reverse the stock’s price on other, even better (or worse) news.
Liquidity. The number of investors trading after hours is a fraction of those trading during regular market hours. With fewer buyers and sellers, orders can be slow to fill or may not fill at all, leaving you stuck with money you can’t get into the market or shares you can’t unload.
Changes in sentiment overnight. Before markets open the next day, plenty of analysts have been crunching the earnings report data or other news. Mychal Campos, Head of Investing at Betterment, likens this to there being more “hot takes” related to the company, which can sway a stock’s price. “You might get into a stock after hours and benefit from that spike in price, but you’re also exposing yourself to risk when the market opens the next morning,” says Campos. If the previous day’s good news begins to trend not-so-good the following day, you could be looking at a big dip in price and incur losses.
Who Can Trade After Hours?
After-hours trading is open to both institutional and retail investors, says Samuel Eberts, junior partner and financial advisor with Dugan Brown. “Originally, it was primarily utilized by institutional investors, but as technology became more widely available it grew in popularity among retail investors,” he said.
How Do You Get Access to After-Hours Trading?
Eberts notes that most investors have access to after-hours trading through their regular financial advisor or online broker. But while access might be common, each broker will have varying rules for its customers.
“It is important to know the rules that pertain to each trading platform before engaging in after-hours trading, since each platform may present different rules such as fees and restrictions,” he says.
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The Bottom Line On After-Hours Trading
For the average investor with an eye on long-term goals like saving for retirement, Campos says that the price movements that happen in stocks after hours don’t really matter over the long term. Still, with low liquidity and the potential for massive price swings, after-hours trading can be a nail-biting proposition for those who choose to engage. As such, it’s typically best to leave after-hours transactions to the day traders and those who rely on short-term market movements as a means of generating earnings.
“After-hours trading is for people who already have a specific trading process and expertise, not to mention the financial resources to weather the volatility that the market can bring,” he says.
After-Hours Trading FAQs
Still have questions about after-hours trading, or need a refresher of the bold strokes? These FAQs can help.
Can You Buy Stocks After Hours?
Yes. After-hours trading allows for stocks to be traded after the stock market’s regular hours. However, investors should be prepared for their orders to not be filled as quickly (or even at all) due to the lower trading volume during these extended market hours.
When Does After-Hours Trading Start?
After-hours trading starts at 4 p.m. Eastern time.
When Does After-Hours Trading End?
After-hours trading ends at 8 p.m. Eastern time.
Is After-Hours Trading Risky?
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.
Can You Trade After Hours At Any Brokerage?
No. Investors are only able to engage in after-hours trading at brokerages that offer this capability, or through financial advisors who offer this type of expertise and access. While many online brokerages offer the service, you should read up on fees charged and the brokerage’s rules for trading during these hours.