After-Hours Trading

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What is 'After-Hours Trading '

After-hours trading refers to the buying and selling of securities completed outside of regular trading hours. Trading outside of the standard trading hours of 9:30 a.m. to 4:00 p.m. Eastern Standard Time uses electronic communication networks (ECNs) to match potential buyers and sellers without using a stock exchange. 

BREAKING DOWN 'After-Hours Trading '

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. After-hours trading was used primarily by institutional investors up until the 1990s when ECNs became more widely available. After-hours trading is now accessible to most investors through the use of brokerage accounts and is also known as “extended-hours trading” and the "after-hours market." 

The after-hours market close is the last transaction and final price of a security that is traded in the after-hours market.

What Are After-Hours Trading Hours?

The morning after-hours trading hours run from approximately 8:00 a.m. to 9:15 a.m. The afternoon after-hours session extends from 4:15 p.m. to 8:00 p.m. Certain pre-market trading takes place as early as 6:00 a.m. during regular trading days and can last until the market opens in the morning.

The Advantages of Trading After-Hours

For traders, there are several advantages to trading after regular market hours. One is convenience. Investors may prefer trading at off-peak times, and after-hours trading provides this added flexibility. Many significant news events, such as earnings releases and economic indicators, are released outside of standard trading hours. The after-hours trading sessions are opportunities to trade immediately on new information rather than waiting for the traditional trading day to take a position. Furthermore, although volatility is a risk associated with trading after hours, you may find some appealing prices during this time.

Finding the Most Volatile Stocks with After-Hours Volume

Company earnings or news releases after the bell draw big attention and create both volume and volatility as traders react to the news. Many of these earnings releases occur "after market close," providing an opportunity to act on the news as it occurs, instead of waiting for the next trading day. The calendar, therefore, provides a list of stocks to watch after hours for an opportunity.

Note the stocks during the day, and narrow the list to a smaller more manageable selection of stocks to trade. Do this by filtering out those with an average daily volume less than 1 million shares. If the shares don't have significant volume during the regular trading session—9:30 a.m. to 4:00 p.m. EST—then it is unlikely to have significant volume after the closing bell, even with a major news release.

Extended Hours Trading Risks

The development of after-hours trading offers investors the possibility of significant 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 after hours trading, 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 wider 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.
  • Tough competition for individual investors: 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 after-hours trading market is thinly traded in comparison to regular-hours trading. Therefore, you are more likely to experience severe price fluctuations in after-hours trading than trading during regular hours.

What is the Nasdaq 100 After-Hours Indicator?

The Nasdaq 100 after-hours indicator is an indicator of post-market sentiment and trading activity, calculated by measuring the after-hours price levels of stocks within the Nasdaq 100 and using the same methodology as that used to create the Nasdaq 100 during regular trading sessions. 

Because some stocks may not be trading in the after-hours session, their prices will remain at the daily close when calculating the Nasdaq 100 after-hours indicator.

How is Late-Day Trading Different from Trading in the After-Hours Market?

While after-hours trading and late-day trading may sound like synonyms, they are two distinct terms. Late-day trading is the illegal buying and selling of mutual funds after regular market hours. This practice is different from after-hours trading of stocks because of one fundamental reason: in the after-hours market for stocks, the prices of securities fluctuate according to normal market forces such as demandsupply, and new information. However, in the late-day trading of mutual funds, the price of the mutual fund (NAV) remains constant after a certain time of day because no one else is allowed to buy and sell it until the next day. This constant price is sometimes referred to as a stale quote because, late in the day, the price is no longer live and will not change.

So, if any material information affecting the fund becomes public after the fund's price is set, an opportunity is created for traders to capitalize on the stale quote price: traders exploiting this opportunity will buy the fund at the close price knowing that the material information will affect the NAV, which will have changed at the opening of the market. This practice is unfair because it is done at a time when other investors are not participating in buying and selling the fund, so the late-day traders are exclusively trading at prices that are momentarily suspended and not reflecting the changes in the fund's "actual" worth—if other investors were allowed to trade the fund, the price would be affected by the market forces in real time, and no one person would have an advantage.