The main trading session of most stock markets is during normal business hours, from 9:30 AM to 4:00 PM, in the daytime. However, trading is not restricted to this time period. Investors can buy and sell stocks after the markets close during the after-hours trading session. There are key differences between trading in the daytime and trading after hours. After-hours trading is convenient and allows for more opportunity, but it also poses more risk compared to regular hours trading.
Overview
After-hours trading, in addition to premarket trading, makes up extended hours trading. After-hours trading begins at 4 PM Eastern Time after most US stock exchanges close. Trading can continue till 8 PM Eastern Time, however, stock volume generally thins before that. During these extended trading sessions, trading takes place through Electronic Communication Networks (ECNs). ECNs computerized systems that automatically match buyers and sellers of stocks. The benefits of ECNs such as anonymity and ease of use have made after-hours trading popular over the past decade. Additionally, trading during extended hours can have some benefits over trading during regular hours.
Benefits
After-hours trading provides investors with an opportunity to react to breaking news. Instead of waiting for the market to open, investors are able to quickly buy or sell stocks in response to new information such as earnings reports. Additionally, stock prices can fluctuate greatly during extended hours, giving investors opportunities to buy and sell at appealing prices. However, this approach is fraught with risk. After-hours trading can also be convenient for investors who want to trade at off-peak times or are unable to trade during regular hours. However, it is important to consider the risks that accompany after-hours trading.
Risks
One of the major risks of after-hours trading is illiquidity in the market. Illiquidity means that it is more difficult to convert shares into cash as there are fewer buyers and sellers compared to regular hours. Another effect of fewer participating investors is a large difference between the bid and ask prices of stocks. Bid price refers to the highest price an investor will pay for a stock and ask price refers to the lowest price an investor will sell a stock for. A large discrepancy between these prices makes it harder to sell or buy stocks at a favorable price. By far the greatest risk of after-hours trading is volatility in the market. Volatility causes severe price fluctuations as a result of reduced volume.
Conclusion
While after-hours trading offers the possibility of great gains, lower volume means that it is one of the riskiest times to trade. For individual investors, it becomes even riskier as competing professionals have access to closed systems that can quickly calculate index values based on individual stock prices. After-hours trading may be an option for you, depending on your risk tolerance, trading style, and investment goals. As Lee Bohl says, “for those traders who understand both the potential risks and opportunities, after-hours trading is certainly an avenue to explore.”
About the author
I’m a senior in the Bay Area. As managing editor, I edit most of the articles published on StreetFins. I also write about connections between finance in the past and present.
