How After-Hours Trading Affects Stock Prices

After-hours trading refers to trading in stocks and ETFs that occurs after the regular market closes. It allows investors to buy and sell securities outside of normal trading hours for a variety of purposes, including responding to news or data releases that occur after the close.

Trades in the after-hours session are completed through electronic communication networks (ECNs) that match potential buyers and sellers without using a traditional stock exchange. These platforms tend to be less liquid than full exchange trading, leading to more volatility and larger price moves on lower trading volume. This presents both opportunities and risks, which we discuss below.

Key Takeaways

  • After-hours trading occurs after regular market hours.
  • Potential buyers and sellers are matched by electronic communication networks (ECNs) rather than traditional markets. 
  • After-hours trading is more volatile and riskier than trading during the exchange’s regular hours because of fewer participants.
  • As a result, trading volumes and liquidity may be far lower than during regular hours.
  • Due to after-hours volatility, the opening price for a stock on the following day may be quite different from the price at which it closed the previous day.

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

How After-Hours Trading Works

Most investors know that the major stock exchanges have standard trading hours—set periods each day when trading occurs through the exchange. The New York Stock Exchange (NYSE) and Nasdaq in the United States trade regularly from 9:30 a.m. to 4 p.m. ET, with the first trade in the morning creating the opening price for a stock and the final trade at 4 p.m. providing the day’s closing price. But trading also occurs outside of those times.

Trading outside regular hours has been around for a long time, but it was once only the domain of high-net-worth investors and institutional investors like mutual funds. However, the emergence of ECNs has enabled individual investors to participate in after-hours trading. Financial Industry Regulatory Authority (FINRA) members can voluntarily enter quotations during after-hours sessions, but they are required to comply with all applicable limit order protection and display rules (the Manning Rule and the U.S. Securities and Exchange Commission (SEC) order-handling rules).

The 3 Stock Trading Sessions

There are actually three markets in which shares can be traded:

  • The pre-market trades from 4 a.m. to 9:30 a.m. ET.
  • The regular market trades from 9:30 a.m. to 4 p.m. ET. 
  • The after-hours market trades from 4 p.m. to 8 p.m. ET.

The pre- and after-hours markets function in the same fashion as the regular market in that the shares are traded between parties at an agreed-upon price. In other words, the price you will receive is the price that someone in the after-hours market or pre-market is willing to pay.

After-hours trading can spike if news breaks after the close of the stock exchange.

Access to ECNs for After-Hours Trading

In the past, the average investor could only trade shares during regular market hours; after-hours trading was reserved for institutional investors. However, today’s markets are more open than ever, and individuals are free to trade in the extended-hours sessions aided by the proliferation of the Internet and ECNs. This has been a step toward a situation in which stock traders are able to make trades 24 hours per day. In 2018, TD Ameritrade adapted its platform to allow for 24-hour trading of certain exchange-traded funds (ETFs), another step in this direction.

Investors can only place limit orders (and not market orders) to buy or sell shares in the after-hours market. The ECN then matches these orders based on the prices set in the limit orders. The use of limit orders reduces the risk of getting “filled” at an undesirable price, which is an important consideration in the after-hours market due to lower trading volumes and hence relatively wide bid-ask spreads. The flip side is that investors may not get their orders executed at all if the stock does not trade at the price specified in the limit order.

Illiquidity: The Risks of After-Hours Trading

Because there are fewer participants than there are during regular trading hours, pre- and after-hours markets will generally have less liquidity, more volatility, and lower volume. This relative illiquidity can have a substantial impact on the price that a buyer or seller ends up receiving for their shares, so it is standard practice to use a limit order on any shares bought or sold outside normal trading hours.

Typically, price changes in the after-hours market have the same effect on a stock that changes in the regular market do: A $1 increase in the after-hours market is the same as a $1 increase in the regular market. Therefore, if you have a stock that falls from $10 (your purchase price) to $9 during the regular day’s trading session, but it then rises by $1.50 to trade at $10.50 in the after-hours market, you will have experienced a $1 loss during the day’s session (from $10 to $9), but because prices rose $1.50 in after-hours trading, you would be sitting on a $0.50-per-share gain.

However, when the regular market opens for the next day’s trading (when most individual investors will have the opportunity to buy or sell), the stock may not necessarily open at the same price at which it traded in the after-hours market.

For example, if a company releases a solid quarterly earnings report after market close, its stock price may increase in the after-hours market. But when institutional and retail investors have parsed through the details of the earnings report, they may discover that the company’s performance was not as impressive as it first appeared. As a result, sell orders may outnumber buy orders at market open, and this selling pressure may cause the stock to open at a price well below the level at which it traded in the previous day’s close or its after-hours market.

The price changes seen in the after-hours market are useful for showing how the market reacts to new information released after the regular market has closed. However, after-hours price changes are often more volatile than regular-hours prices, so they should not be relied on as an accurate reflection of where a stock will trade when the next regular session opens.

When Can I Trade in the After-Hours Market?

After-hours trading is available from 4 to 8 p.m. ET. Pre-market trading is available from 4 to 9:30 a.m. ET.

How Can I Trade in the After-Hours Market?

You would trade just like you would during regular hours, by logging into your brokerage account and selecting the stock that you wish to trade. The only difference is that you will have to use a limit order to buy or sell the stock, rather than the kind of market order that you might place during regular trading. Be mindful that bid-ask spreads may be wider than they are during regular trading hours, and stock price moves can also be more volatile.

Why Would an Investor or Trader Want to Trade in the After-Hours Market?

Numerous companies release quarterly earnings reports after market close. Occasionally, market-moving news also hits the news wires after regular trading hours. The ability to react to these developments outside of regular hours is invaluable for investors and traders, especially if they want to exit a long or short position. A trader with a long position, for instance, may be willing to accept a less-than-ideal price in the after-hours market to close it out at a loss, rather than take the risk of leaving the position overnight and incurring larger losses the next day.

Why Are Stock Prices More Volatile in After-Hours Trading?

The number of participants in after-hours trading is a fraction of those during regular market hours. Fewer participants means lower trading volumes and liquidity, and hence, wider bid-ask spreads and more volatility.

If My After-Hours Order Is Not Filled, Will It Carry Over to the Next Day’s Trading?

After-hours orders are only good for that session, so if your limit order has not been executed, it will be canceled, and you will have to put in a new order for the next day’s regular trading session.

The Bottom Line

While normal market hours end at 4 p.m. EST, stocks can and do continue to trade. Though participating in after-hours markets can benefit investors and traders who want to trade news like earnings releases that are announced after the close. However, the risks of engaging in after-hours trading can be significant. This is because these markets tend to be less liquid and can experience large prices moves on relatively low volume. Anyone participating in after-hours market activity should be mindful of these risks.

Article Sources
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  1. Financial Industry Regulatory Authority. "Notice to Members, Limit Order Protection."

  2. Nasdaq. “What Time Does the Stock Market Open and Close?

  3. CNBC. "The Regular Investor Can Now Trade the Stock Market 24 Hours a Day With TD Ameritrade."

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