A:

After-hours trading is defined as the exchange of securities outside of an exchange's specified regular trading hours (usually 9:30am to 4pm EST). After-hours trading occurs through an electronic communication network (ECN), which is essentially an interface that allows buyers and sellers to match-up their buy and sell orders for a security even though the regular exchange through which the security trades is closed for the evening. While there are many benefits of after-hours trading, one of its drawbacks is that it usually operates with significantly less volume than the traditional exchange-based trading day. It is because of the low volumes typically traded through after-hours trading systems that the after-hours bid and ask prices for specific securities can become widely separated.

This may seem like a difficult concept to understand, but it is actually quite straightforward. Recall that securities are traded through exchanges by creating a match between buyers and sellers, for example, the "quote" for a stock you see is really just the last price at which a trade was successfully completed. Also recall that the "bid" for a security is the buy order with the highest price that has not yet been filled, and the "ask" for a security is the lowest-priced sell order that has not yet been filled.

In order to match the hordes of buy and sell orders, exchanges start with the highest bid (buy order) and try to match it up with the lowest ask (sell order). Because there are usually thousands of bid and ask orders in the system during the trading day, chances are usually very good that there will be little difference separating the highest bid order from the lowest ask order. However, once the trading day finishes and after-hours trading commences, there are much fewer participants entering bid and ask orders into the system for a security. Because of this lack of order volume, there is a much greater chance that a big dollar value difference will exist between the quoted bid and ask values for a particular security.

If a stock has a wide difference between its after-hours bid and ask prices, this usually means that there is little after-hours trading going on (if any), and usually does not imply that there has been a big change in the security's market value.

To learn more about the mechanics of securities trading, check out The Basics Of Order Entry and The Nitty-Gritty Of Executing A Trade.

RELATED FAQS
  1. 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 Answer >>
  2. 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 Answer >>
  3. What trends and data influence after-hours traders the most?

    Learn about the specific information that after-hours traders review to influence their trading. Read Answer >>
  4. 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 Answer >>
  5. How are after hour trading rates determined?

    I am new to stock buying and I was just wondering that if I buy stocks after trading hours (normally 4.30 EST for NASDAQ) ... Read Answer >>
  6. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
Related Articles
  1. Markets

    What's After-Hours Trading?

    After-hours trading occurs on major exchanges outside of regular trading hours, and takes place between 4:30 and 8 p.m. Eastern time.
  2. Markets

    Can I Sell A Stock At The After-Hours Price?

    Most major exchanges trade from 9:30 am to 4 pm Eastern Standard Time, but you’re not limited to selling stock between those hours.
  3. Trading

    What Is The Difference Between After-Hours Trading And Late Trading?

    “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 ...
  4. Investing

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
  5. Markets

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
  6. Markets

    How Bid Price Affects Liquidity

    The bid price is the amount a buyer will pay for a security.
  7. Investing

    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.
  8. Investing

    The Basics Of The Bid-Ask Spread

    The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders.
  9. Trading

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  10. Investing

    The Opening Cross: How Nasdaq Stock Prices Are Set

    The National Association of Securities Dealers Automated Quotations, commonly referred to as Nasdaq, is a computerized marketplace where stocks are traded from 9:30am to 4pm Eastern Standard ...
RELATED TERMS
  1. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The ...
  2. After-Hours Market Close

    The last transaction and final price of a security that is traded ...
  3. Nasdaq-100 After Hours Indicator

    An indicator of post-market sentiment and trading activity, calculated ...
  4. Ask Size

    The amount of a security that a market maker is offering to sell ...
  5. Bid Price

    The price a buyer is willing to pay for a security. This is one ...
  6. Best Bid

    The highest quoted bid for a particular trading instrument among ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center