What Is After-Hours Trading?
After-hours trading starts at 4 p.m. U.S. Eastern Time after the major U.S. stock exchanges close. The after-hours trading session can run as late as 8 p.m., though volume typically thins out much earlier in the session. Trading in the after-hours is conducted through electronic communication networks (ECNs).
Understanding After-Hours Trading
The Spark
After-hours trading is something traders or investors can use if news breaks after the close of the stock exchange. In some cases, the news, such as an earnings release, may prompt an investor to either buy or sell a stock.
Volume
The volume for a stock may spike on the initial release of the news but most of the time thins out as the session progresses. The amount of volume generally slows significantly by 6 p.m. There is a substantial risk when trading in illiquid stocks after-hours.
Price
Not only does volume sometimes come at a premium in the after-hours trading sessions but so does price. It is not unusual for the spreads to be wide in the after-hours. The spread is the difference between the bid and the ask prices. Due to fewer shares trading, the spread may be significantly wider than during the normal trading session.
Participation
If liquidity and prices weren’t enough of a reason to make after-hours trading risky, the lack of participants makes it even riskier. In some cases, certain investors or institutions may choose simply not to participate in after-hours trading, regardless of the news or the event.
This means that it is quite possible for a stock to fall sharply in the after-hours only to rise once the regular trading session resumes the next day at 9:30 a.m., should many big institutional investors have a different view of the price action during the after-hours trading session.
Because volume is thin and spreads are wide in after-hours trading it is much easier to push prices higher or lower, requiring fewer shares to make a substantial impact. Since after-hours trading can have a significant impact on a stock’s price, it’s not a bad idea to put a limit order on any shares you intend to buy or sell outside of regular trading periods.