“After-hours” trading and “late trading” both refer to investments made outside of normal business hours. While the two activities sound similar and often take place in similar time frames, the former is perfectly legal while the latter is not.

Pre-Market Trading and After-Hours Trading

Stock markets have normal business hours during which they are open for trading. In the United States, those hours are typically 9:30 a.m. to 4 p.m. Eastern Time (ET), Monday through Friday. The vast majority of trades take place during these hours. At one time, once the market closed for the day, only professional investors could place trades. Today, anyone can buy and sell stock during three distinct time periods, including two designated “extended-hours” windows during which the market is closed.

The first non-traditional trading period is known as “pre-market” trading. Pre-market trades take place in the morning, before the various stock exchanges actually open for business. Because investors trade through brokerage accounts, the specific times that they can trade may be limited by the rules associated with those brokerage accounts. TDAmeritrade (AMTD), for example, permits investors to engage in pre-market activity from 8 a.m. to 9:15 a.m. Fidelity permits trading as early as 7 a.m., while Vanguard does not permit it at all.

The second non-traditional trading period is the one most commonly referred to as “after-hours” trading. These trades take place after 4 p.m. ET, when U.S. stock markets are officially closed. Like pre-market trading, the hours during which after-hours trading is available vary based on the restrictions attached to a given brokerage account.

Why Investors Do It

Extended-hours trading provides a perfectly legal way to invest. It gives investors an opportunity to monitor stock prices based on earnings announcements, mergers and acquisitions, and other events that occur or are announced outside of normal trading hours. These events often cause stock prices to move, giving investors an incentive to buy and sell. Someday soon, investors will be able to trade 24 hours a day/7 days a week.

Risks and Challenges

On the other hand, just because you can trade after hours doesn’t mean that you should. After-hours trading can present a challenging environment for investors. Since trading occurs courtesy of a variety of electronic communication networks (ECNs), the rules, including security availability and trading hours, are set independently. Similarly, since the actual stock markets are closed during pre-market and after-hours trading, determining the fair “market” price of a given security can be a challenge. Most notably, the price on one ECN may not be the same as the price on another. Even getting the information you need to make an informed trade can be difficult. Beyond the mechanics of gathering information and placing a trade, the Securities and Exchange Commission warns investors about a host of potential hazards associated with after-hours trading. Some of the major challenges include those associated with:

· Quotes

Each ECN lists quote prices for stocks. Those quotes are often posted in isolation, meaning that they have no relationship to the quotes posted on other ECNs. The price you pay on a given ECN could be higher or lower than the price available on other networks.

· Liquidity

Most trades take place during normal business hours when the stock exchanges are open. The volume of trades during pre-market and after-hours trading is significantly less, which can make it difficult to find willing buyers/sellers to execute trades.

· Spreads

The reduced volume of trading activity outside normal business hours can cause prices to be higher than what they might be if the markets were open and a larger number of buyers and sellers were seeking to make deals.

· Volatility

Price fluctuations during extended-market trading can be notably larger than those seen during normal business hours.

It is also worth noting that the traders making after-hours moves during non-traditional hours are often professional investors at big firms. Other investors may be at a disadvantage in both experience and access to information when compared to the professionals. Still, even for investors who choose not to trade during extended hours, simply monitoring the results of the after-hours and pre-market action can provide insight into trends and prices. This information often provides an indicator of the future direction investors will see markets/securities move when normal business hours resume. (The official SEC guidelines for after-hours trading can be found here.)

Late Trading

“Late trading” describes mutual fund transactions in which a buyer or seller places an order after 4 p.m. but is permitted to price the trade based on the closing price that was struck at 4 p.m. Such trades are illegal, because they give the buyer or seller an unfair advantage over other investors. The advantage results from the fact that mutual funds are priced just once a day. Unlike stocks, which change prices many times throughout the day, mutual fund prices are set once per day at 4 p.m. All trades placed prior to 4 p.m. get that day’s price. Trades placed after 4 p.m. are supposed to receive the next day’s price - but it doesn’t always happen that way. (See also "Why Late Trading is Illegal.")


In 2003, New York Attorney General Eliot Spitzer accused Nation’s Funds, owned by Bank of America (NYSE:BAC), of permitting hedge fund Canary Capital to engage in late trading as well as other unethical behavior. The scandal grew and ultimately engulfed more than a dozen companies, including Strong Capital Management, Putnam Investments, Alliance Capital Management, Goldman Sachs Group, Invesco, Janus, Morgan Stanley and more.

The Heart of the Crime

The essence of late trading is that it gives criminals an unfair information advantage. For example, consider an investor who purchased a given mutual fund at $10 per share. When the investor wants to sell these shares, he/she places a sell order. The amount the investor will receive per share is determined at the end of the day. The investor has no way to know for sure what that number will be prior to placing the order to sell. If the closing price is $9.99, the investor will lose money on the trade. If the closing price is $10.01, the investor will make a profit. Investors engaged in illegal late trading are told the closing price before they place their order to sell. If the price is $9.99, late traders would not place the trade. If it was $10.01, they would place the trade and lock in a guaranteed profit while taking absolutely no risk. Worse yet, because the trading costs are shared among all investors in a mutual fund, the illegal trade's cost is partially paid by the other investors who hold fund shares. The criminal makes a profit, while the legitimate investors take all the risk and help underwrite the costs of the illegal trade.

The Bottom Line

After-hours trading gives investors the opportunity to extend the length of their trading days. But for most long-term investors, normal business hours provide plenty of opportunity to trade and fewer potential pitfalls. If you are saving for retirement, a child’s education or other long-term goals, there is probably little need for you to engage in after-hours trading. Late trading is not something most investors will ever encounter during the course of their investment endeavors. It is an illegal activity that takes place between professional investors. Their bad behavior drives up costs for everybody else and generates bad publicity, which causes legitimate investors to question the ethics and intentions of major financial institutions and Wall Street in general.

Related Articles
  1. Investing Basics

    Activities You Can Take Advantage Of In The Pre-Market And After-Hours Trading Sessions

    A great deal can happen in between the New York close of the market and the open the following morning. Learn how you can access opportunities and hedge against risk outside regular trading hours.
  2. Mutual Funds & ETFs

    Why Late Trading Is Illegal

    Institutional investors got a sweet deal that soured retail investors' mutual fund returns.
  3. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  4. Professionals

    Top 3 Misconceptions About Financial Analysts

    Learn misconceptions about financial analysts, such as they exclusively study the stock market, they are the same as financial advisors and they are all rich.
  5. Active Trading

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
  6. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  7. Investing Basics

    What is Equity?

    Think of equity as ownership in any asset after all debts stemming from that asset are paid.
  8. Investing Basics

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  9. Investing Basics

    Valuation Of A Preferred Stock

    To find the value of the preferred stock, each future dividend payment needs to be discounted back to the present, and then added together.
  10. Economics

    5 Ways to Play the Stock Market after an Interest Rate Hike

    When the Fed will raises rates is still the unknown, but if it happens investors can benefit. Financials, consumer and growth stocks should do well.
  1. Why are the bid and ask quotes usually so far away from each other in after-hours ...

    After-hours trading is defined as the exchange of securities outside of an exchange's specified regular trading hours (usually ... Read Full Answer >>
  2. What is late-day trading? Why is it any different from buying and selling stocks ...

    Late-day trading is the illegal buying and selling of mutual funds after regular market hours. This practice is wrongful ... Read Full Answer >>
  3. How can my stock's price change after hours, and what effect does this have on investors? ...

    Most investors know that the major stock exchanges have standard trading hours - set periods of time each day when trading ... Read Full Answer >>
  4. Where can I find information about pre- and after-hours trading on the NYSE and the ...

    The stock market, particularly the NYSE and Nasdaq, is traditionally open between 9:30am and 4pm EST. Over time, with the ... Read Full Answer >>
  5. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  6. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>

You May Also Like

Trading Center