An Introduction to After-Hours Trading
Traditionally, stock market trading occurs during the day. In fact, when most people think of stock market trading, they probably think of lots of people in suits on the trading floor of a stock exchange engaging in various trading strategies. Pandemonium reigns as they compete for shares during the trading session.
But did you know that after-hours trading is also a thing? And now you’re probably wondering what after-hours trading is.
It’s true. You can buy and sell shares of stock outside of the normal stock market hours. Of course, as with all things, there are both pros and cons to doing so you’ll need to be aware of.
In this article, we’ll look at what after-hours trading is and how it’s done, then we’ll look at the pros and cons of engaging in this type of trading.
So What Is After-Hours Trading?
Simply put, after-hours trading is the buying and selling of shares of stock outside of the main trading session’s regular hours. A trading session is the period of time when people engage in trading on the stock market.
For example, the normal trading hours of the New York Stock Exchange are between 9:30 a.m. and 4 p.m. each weekday. Every day, the main trading session during this time interval during the business day counts as one individual trading session.
The beginning of the trading session is famously marked by the opening bell, and, of course, the closing bell sounds at 4 p.m. to mark the end of the trading session.
When after-hours trading occurs after the closing bell, it’s known as post-market trading. This generally occurs between 4 p.m. and 8 p.m. And similarly, pre-market trading occurs prior to the opening bell at 9:30 a.m. each business day.
Now let’s take a look at how it works.
How Does After-Hours Trading Work?
After-hours trading is quite different from the trading that occurs during the regular stock market trading session. It occurs over electronic communication networks (ECNs) that permit potential buyers to match with potential sellers. In this way, it bypasses the need for a traditional stock market exchange and all that entails.
In general, there is much lower trading volume after hours because there are far fewer active traders during these sessions. One consequence of this is that there tends to be a larger spread between the bid prices (the highest price a buyer will pay) and the ask prices (the lowest price a seller will accept).
However, there are times when major news about the economy or a particular corporation can drive a large spike in after-hours trading volume as people try to trade on the news.
So who is allowed to get in on this after-hours action?
Originally, these after-hours trading sessions were available only to large institutional investors. Post-1999, however, ECNs became much more widely available to retail investors (aka individual investors) as well.
These days, traders can even use some online platforms like Schwab, TD Ameritrade and Fidelity to engage in after-hours trading, making it much more available to institutional and retail investors than ever before.
The Pros and Cons of After-Hours Trading
We can break down the pros and cons of after-hours trading along the following lines…
Access: The main positive of after-hours trading is that individual retail investors can get in on the action, and so they don’t have to wait for the next main trading session to buy or sell their intended position.
Timing: If there is important breaking news with regards to the broader economy or particular companies, being able to trade after hours helps you get in on the action before the rest of the active traders the following day.
Flexibility: Perhaps you are interested in doing some day trading or working on transactions in the evenings because you work a day job and can’t do it during the day.
Competition: Of course, these retail investors will now be competing against large institutions with fancy technology. This makes it harder to be on the “winning side” of a trade.
Price: As I mentioned above, due to the lower trading volume, there is generally a larger spread between the bid and ask price of a trade. Generally, this means that you may not get the best price on your purchase of shares compared with trades made during the day.
Risk: Again, due to the lower trading volume, the after-hours market can see much greater volatility in stock prices, which can make trades at the price you want more difficult.
Liquidity: Once again, the lower trading volume makes things thorny because it decreases liquidity. If you are looking to convert your stocks to cash, this could take longer and be more challenging.
As you can see, there are a number of risks associated with after-hours trading. Nevertheless, the fact that retail investors like you can access it still gives you an advantage over having no access to it at all.
Though most stock market trading occurs during the main daily trading session, it is still good to be able to have the option to trade in either post-market or pre-market sessions.
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Now that we’ve discussed after-hours trading in some detail, I hope you have a better understanding of how it works and the pros and cons of engaging in it. If you decide to trade after hours, may good fortune always be on your side.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.