April 20, 2024

Overview, Participants, Advantages, and Risks of After-Hours Trading

3 min read

After-hours trading refers to any trade that takes place outside of normal business hours. After-hours trading in the United States starts at 4 p.m. Eastern Standard Time ((EST)) and lasts until 8 p.m. EST. When it comes to after-hours trading, investors need be aware of both its advantages and disadvantages.

After-hours trading in stocks

An investor may buy and sell assets after the market closes, which is known as “after-hours trading,” since it is outside of typical trading hours. For the NYSE and Nasdaq, the trading hours are 9:30 am to 4:00 pm, Eastern time, Monday through Friday, except on holidays (ET). The after-hours trading session is open from 4 p.m. to 8 p.m. ET.

During these prolonged trading periods, electronic communication networks (ECNs) connect prospective buyers and sellers. The trade volume is often low in the after-hours trading session. This is due to the low volume of trades that occur at this time of day. There are exceptions to this rule, such as big economic news or an unexpected development at a corporation.

Traders should be prepared for wider spreads when the market closes (the difference between the bid and ask prices).

What is the purpose of after-hours trading?

The usual trading on the markets during business hours is separate from after-hours trading. Instead of going via the exchange, your order is sent over an electronic communication network (ECN). This has several disadvantages and dangers as compared to regular trading on Nasdaq or the New York Stock Exchange.

Limit orders are the sole way investors may buy or sell shares. The ECN uses limit prices to match orders. In addition, after-hours orders are only valid for the duration of that session. The next day, if you’re still interested in the goods, you’ll need to make a fresh order.

The stock you want to acquire for an after-hours trade is available in your brokerage account. Limit orders are then placed as you normally would during a trading session. Your broker may charge you extra costs if you trade in the middle of the night.

Once the electronic communication network (ECN) that your broker uses for after-hours trading receives your order, it will process it. Your order will be matched to a purchase or sell order on the network via the ECN. For example, if you want to sell 100 XYZ shares for $50 each, the ECN will look for a buyer willing to buy at least 100 shares at that price.

Who is able to trade in the evening?

After-hours trading was formerly restricted to large institutional investors and wealthy families that were comfortable with unconventional trading tactics. The volume of trades was fairly little. The after-hours market was dominated by wealthy investors prior to the emergence of electronic communication networks (ECNs) in the 1990s.

ECNs allowed individual investors to trade outside of traditional trading hours. As more retail investors became familiar with the ECNs’ hourly trading, the trading volume began to rise. Fidelity, Vanguard, TD Ameritrade, and Charles Schwab all provide off-peak trading. Brokers may charge a fee for this additional service.

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