Last Updated on 17 November, 2020 by Samuelsson
The advent of the internet and online trading platforms have not only made retail stock trading popular but also made it possible to trade in the after-hours session. But who can trade in the after-hours market?
Any investor, who has a trading account with an online brokerage firm that allows after-hours trading, can trade during the after-hours session. An online trading account is very necessary because trading is conducted through electronic communication networks (ECNs) in the after-hours market.
Obviously, you may want to know how the after-hours trading work and the benefits of trading the after-hours market, but first, let’s find out what after-hours trading is.
What Is After-hours Trading?
After-hour trading is stock trading that happens through the electronic communication networks after regular stock market trading has closed for the day. It is the period of time, after the day’s market close, when most online brokerage firms allow their clients to buy and sell stocks through the electronic market platforms.
In the US, after-hours trading starts from 4 PM Eastern Time, when the NASDAQ and the New York Stock Exchange (NYSE) close, and can run till around 8 PM, but after the first hour, volume usually thins out. However, the after-hours session is not the same for all brokers. Some close their after-hours session earlier than others, while some open late.
For instance, Wells Fargo opens for after-hours trading at 4:05 p.m. and close by 5:00 p.m., while TD Ameritrade opens for after-hours trading at 4:15 p.m. and can stay open till the next day. It is worth noting that some brokers may charge extra fees for after-hours trading. Other brokers that offer after-hours trading include Fidelity and Charles Schwab.
Before the proliferation of electronic market platforms in the 1990s, after-hours trading was only available to the institutional traders. But with the availability of electronic communication networks, retail investors can now access the after-hours market through their online broker’s platforms.
During the after-hours sessions, the ECNs match potential stock sellers with the appropriate buyers electronically, without passing through the stock exchange. Thus, there are limitations to how a trader can trade in the after-hours market. The limitations vary with brokers, but generally, most brokers only accept limit orders and don’t allow stop orders.
The Benefits of After-hour Trading
The fact that it’s possible to buy and sell stocks after the close bell is great on its own. After all, retail investors didn’t have that privilege in the past. Being able to have access to the market when the stock exchanges have closed for the day is beneficial in the following ways:
1. Reacting Early to News Events
Many corporations release their quarterly earnings and other important news after the regular market hours to avoid huge knee-jerk reactions that may not reflect the actual value of their stocks. When such news is released, a trader can immediately place a trade in the after-hour market, so he doesn’t need to wait for the market to open the next day to react to the news.
2. Convenient Trading
Some retail traders go to work or attend to some other businesses during the regular trading hours, so they may not be able to trade at that time. But with the after-hours market, such traders can conveniently check the market for potential trading opportunities. After-hours trading gives individuals the flexibility to trade at their convenience.
3. Discovering Pricing Opportunities
The after-hours session can be highly volatile, but sometimes, it is possible to find stocks trading at a discount during this time. This may happen when there’s a huge supply of a stock during the last minutes of the regular trading hour, which unduly pushes the price down.
Disadvantages of After-Hour Trading
While the availability of after-hours trading offers retail investors the opportunity to benefit from the market, there are risks associated with it, and here are some of them:
1. Lower liquidity
Generally, fewer shares are traded during the after-hours session because most traders have closed for the day. In fact, some stocks don’t trade at all in the after-hours market. As a result of this reduced trading volume, it may be harder for orders to go through. Liquidity tends to improve if there’s a news release, but it’s often short-lived.
2. Higher Volatility
Because of the lower liquidity during the after-hour session, the market tends to be more volatile. Relatively small orders can significantly move the price of a stock. So price can fluctuate more widely during the after- hours.
3. Higher Cost of Trading
Of course, the fact that there fewer traders participating in the after-hours market means that there will be fewer price quotes available, which will result in the ask-bid spread getting wider than usual. This will affect the price and make it hard for orders to get filled at favorable prices.
4. Limited Order Options
During the after-hours session, the type of order a trader can place is limited. Depending on the online broker, a trader may be able to use only limit order and may not be able to trade more than 25,000 in one order. Furthermore, certain orders may not be carried over into the next trading day.
5. Competing With the Institutions
For some types of securities, like index-based products, a retail trader may not be able to get the right calculation of the index values during the after-hour session while the institutional players can have access to systems that can quickly calculate the index values from individual stock prices. This puts the retail traders at a disadvantage.
Opening Hours for the Biggest Exchanges
In the U.S. stock market, the biggest stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. Both exchanges are open for six and a half hours each day, Monday through Friday — except on federal holidays.
These exchanges open by 9:30 a.m. and close by 4:00 p.m. Eastern Time (ET), so the regular stock market trading hours in the US is from 9:30 a.m. to 4:00 p.m. ET.
An individual investor, who has a trading account with an online brokerage firm that allows after-hours trading, can trade during the after-hours session. An online trading account is necessary because trading is conducted through the ECNs in the after-hours market.
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