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After-hours trading (AHT) refers to the buying and selling of securities on major exchanges after the specified regular trading hours. Both the New York Stock Exchange and the Nasdaq National Market operate regularly from 9:30 a.m. to 4:00 p.m. ET. Buy and sell orders in the AHT session can be entered and executed anytime between 4:00 pm and 8:00 pm EST.

At one time limited to institutional investors and individual investors with high net worth, AHT is now an option for the average investor as well.

The emergence of electronic communication networks (ECNs) ushered in a new era in stock trading. An ECN is an interface that not only allows individual investors to interact electronically, but also lets large institutional investors interact anonymously, thereby hiding their actions.

The development of AHT offers investors the possibility of great gains, but you should also be aware of some of its inherent risks and dangers:

  • Less liquidity - There are far more buyers and sellers during regular hours. During AHT there may be less trading volume for your stock, and it may be harder to convert shares to cash.
  • Wide spreads – A lower volume in trading may result in a wide spread between bid and ask prices. Therefore, it may be hard for an individual to have his or her order executed at a favorable price.
  • Small fish – While individual investors now have the opportunity to trade in an after-hours market, the reality is that they must compete against large institutional investors that have access to more resources than the average individual investor.
  • Volatility – The AHT market is thinly traded in comparison to regular-hours trading. Therefore, you are more likely to experience severe price fluctuations in AHT than trading during regular hours.

AHT can be illustrated with an investor who would like to sell her shares of Goldman Sachs (GS) for $230.00 after hours. Due to the highly illiquid nature of the after hours market, the highest bid price from the sparse number of buyers is $220.00. She can either change her limit price to $220.00 to sell right away or she can keep her original price and run the risk of a partial order or a 'not-filled' order. At the end of the trading session at 8:00 pm, all orders that were not executed will be canceled.

We've covered the risks of AHT, but you should also be aware of the benefits. Having the ability to trade around the clock allows you to react quickly to breaking news stories or fresh information before market open the next day. Furthermore, although volatility is a risk associated with trading after hours, you may find some appealing prices during this time.

AHT has developed to the point where all interested investors, big or small, have an opportunity to do business outside of standard hours. Just remember that while there are benefits to participating in AHT, you should also be mindful of the risks.

(For more information, see The Nitty Gritty of Executing a Trade.)

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