What Is After Hours Trading & How Does It Work

The typical image of stock market trading is Wall Street extremely crowded with traders. However, some investors have found how to profit from the stock market outside of normal trading hours in a less crowded place to trade – the after hours trading session. This time period is outside the stock market’s regular trading hours and can give you a leg up on the competition. This begs the questions, “What is after hours trading, and when does after hours trading end?”

What Is After Hours Trading?

Extended trading is trading when the financial markets are closed. Pre-market trading is when investors trade assets before the stock market officially opens, while after hours trading is a trading session after the market is officially closed.

Institutional investors primarily used after hours trading or post-market trading. However, in the 1990s, Electronic Communication Networks (ECN) became more widely available. ECNs allow individual investors to begin trading and interacting electronically, opening up the opportunities for after hours trading.

When Does After Hours Trading End?

The United States equities market, such as the New York Stock Exchange (NYSE) and NASDAQ, regularly operate between 9:30 a.m. Eastern Standard Time (EST) to 4:00 p.m. EST every Monday through Friday. After hours trading begins at 4:00 p.m. and ends at 8:00 p.m. EST. Moreover, the exact time you can execute trades depends on your broker.

For example, your broker may require that you wait until a specific time before placing orders even though post-market trading has already begun. In the past, TD Ameritrade needed traders to wait until 4:15 p.m. to begin trading. However, on September 21, 2017, they expanded their after hours trading sessions to start at 4:02 p.m. and go through 8:00 p.m. EST. Fortunately, TD Ameritrade brokers do not charge extra for trading during these special sessions; only the regular commission rate applies.

On the other hand, Wells Fargo’s after hours trading is from 4:05 p.m. to 5:00 p.m. They do not have the technology to execute trades outside of regular market hours. Therefore, customers must verbally submit the order by calling the broker on the phone. Although agent-assisted phone orders usually incur a surcharge, it is waived for extended-hours trades.

Be sure to inquire about your broker’s extended hours and any possible additional fees for after hour trades.

How Does After Hours Trading Work?

There are advantages and limitations of after hours trading. The Financial Industry Regulatory Authority (FINRA) reminds firms that under FINRA Rule 2265, they must disclose the material risks of extended hours trading to a customer. It is critical for traders to understand how after hours trading works as well as its inherent risks.

Pros of After Hours Trading

Post-market trading has certain advantages for experienced traders.

Convenience and Flexibility

One of the most apparent advantages of after trader hours is the ability to trade at off-peak hours. This change in schedule is particularly attractive to West Coast traders. Regular trading hours for someone on the West Coast is 6:30 a.m. to 1:00 p.m. PST. This schedule may translate to waking up at 4:00 a.m. to catch up on the news and prepare for the trading day.

On the other hand, post-market trading hours between 4:00 p.m. and 8:00 p.m. EST would be 1:00 p.m. to 4:00 p.m. PST. Thus, making after hours trading  seem a bit more manageable now. Alternatively, the extra trading hours may also seem attractive to traders who already have a full-time job.

React Quickly to News and Announcements

Most companies strategically release new events, such as quarterly earnings results after the market is closed. This gives the market and investors, some time to process the information and minimize any knee jerk reactions that may result in tremendous losses during the regular trading day.

When the market is closed, fewer traders will act on the information. In other words, if you trade during the after hours trading session, you are in a new position to react quickly to breaking news or this new information before other traders to lock down winning positions or exit losing ones. This gives you a head start before other trades who would wait until the market opens the next day to make their move.

More Pricing Opportunities

While securities are typically volatile during after hours trading, you may be able to find some appealing prices during this time. Especially at the close of the trading day, a stock may experience a supply-demand imbalance as traders rush their final market orders. Therefore, after hours trading may capitalize on the imbalances of the previous trading day.

Furthermore, after hours trading is known for big price swings because fewer traders are trading fewer shares from 4:00 p.m. to 8:00 p.m. As a result, after hours trading may present some unique profitable opportunities.

Cons of After Hours Trading

While there are inherent risks to trading, after hours trading comes with additional dangers that you should be mindful of.

Less Liquidity

Post-market trading has fewer buyers and sellers as compared to regular hours. As a result, there may be less trading volume for your stock. Less volume and liquidity means that there is less supply and less demand. However,, there no guarantees that your order will be filled, and it may be harder to place and exit trades.

 Wider Bid-Ask Spreads

Less liquidity can lead to wider bid-ask spreads. A bid is the price that a buyer is willing to pay for a stock. The ask is the price that a seller is willing to sell a stock for. The spread is the difference between the two amounts.

With a wider spread, it is more difficult to execute trades in your favor. If your trade is placed at an unfavorable price, it could mean potential losses of 5 percent or more, severely cutting into your profit.

Higher Volatility

Extended trading hours are infamous for higher price volatility compared to regular trading hours. With low volume and wide spreads, a few shares can result in significant price movements. Under those circumstances, be prepared for significant price fluctuations because the market is thinly traded and the potential for a major company news item release.

Stronger Competition

We know that trading is not for the faint of heart. However, after hours trading has a higher percentage of skilled professional traders. As a result, individual traders may be competing against traders that are part of large institutions, such as mutual funds, who may have more resources and access to more information.

Different Rules

Most brokerage firms only allow limit orders during off-peak trading hours. As a result, your orders may only be executed at a fixed share price. In other words, your orders will only be filled at a specific price or better, according to the Electronic Communication Network’s best offer. Unfortunately, limit orders increase the risk that trades go unfilled.

Miss Out on Economic Indicators

While after hours traders may benefit from a company’s earnings reports, they miss out on many economic indicators that are released at 8:30 a.m. EST or one hour before the markets open. Traders that are active during pre-trading sessions, from 4:00 a.m. to 9:30 a.m. EST may benefit from these economic indicators.

For example, the Employment Situation Summary or jobs report by the U.S. Bureau of Labor Statistics (BLS) is released on the first Friday of every month at 8:30 a.m. Trading during the post-market session would not be able to react to these reports, but instead, anticipate the price movements for the next morning.

Uncertain and Changing Prices

The prices of securities traded after hours may not accurately reflect the prices from the end of the regular trading day to opening the next morning. Consequently, even if a stock rises during post-market trading, it may fall when regular trading opens again.

For example, Nvidia Corp. (NVDA) reported its quarterly results on February 14, 2019. The stock price jumped from $154.50 to $169 within the first ten minutes of the news release. Unfortunately, by the next morning, when approximately 2.3 million shares were traded, the price dropped from $164 to $161 and continued to decline, closing at $157.20, just $3 higher than the previous day’s close. Nearly all the gains from the after-hours had disappeared.

Pre-Market Trading Versus Post-Market Trading

Pre-market trading occurs before the market opens while post-market trading happens after the market closes. While both pre-market trading and post-market trading are considered extended trading sessions, they typically utilize different trading strategies.

In general, pre-market trading reacts to the information that came out overnight, such as earnings reports and economic indicators. On the other hand, after-hours trading capitalizes on price movements that occurred during the previous trading day and anticipates the movements that will happen the next morning.

Conclusion

While after hours trading may be lucrative, it comes with additional risks. Only experienced traders with a sound strategy should endeavor to learn how to do after hours trading. Be disciplined with your day or swing trading strategy, as the market is especially volatile with less liquidity, lower volume, wider bid-ask spreads, and different trading rules.

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