What is after-hours trading, and who can trade after hours?

What is after-hours trading, and who can trade after hours?

2022-04-29 • Updated

I wish every asset would be like cryptocurrency, not because crypto can jump 100% a day and immediately after that slump by half of the growth (it is still funny, though). Unfortunately, the one great thing ordinary assets don't have is 24/7 trading. Most forex instruments are available to trade 24/5, but what about stocks. Are they available only several hours a day? Well, yes and no, but mostly no. In this article, you will learn about premarket and after-hours trading:

  • What is it?
  • Who can use it?
  • Is it better in any way than classical trading?
  • And many more!

What is after-hours trading?

After-hours trading takes place after the trading day for a stock exchange, and it allows you to buy or sell stocks outside of regular trading hours. It is also called an extended trading session.

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 that you will receive is the price that someone in the after-hours market or premarket is willing to pay.

After-hours trading allows investors to react to company earnings releases and other news that typically occurs before or after normal trading hours. For example, prices can swing wildly on an earnings release or news that a CEO is stepping down. So if you want to buy or sell as soon as possible based on the news, you'll need to place an order for after-hours trading.

After-hours trading times

There are a couple of extended trading sessions:

  • The premarket trades from 4:00 to 9:30 ET.
  • The regular market trades from 9:30 to 16:00 ET.
  • The after-hours market trades from 16:00 to 20:00 ET.

Not every trading broker gives access to pre- and -after-hours trading. And not every broker lets you trade all pre- and after-market hours. For example, some brokers give you the opportunity to trade only for an hour before the market opens and after it closes. The terms are different and depend on regulations (and brokers' wish to do as they want).

Who can trade after hours?

After-hours trading started approximately in 1999. At that time, most stock exchanges introduced electronic communication networks (ECNs – a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges). With ECN, traders and investors little need to place orders personally in the stock exchange building.

Nowadays, most market participants use extended trading sessions to react to the news quicker than others. Examples of such news are:

  • Earnings reports.
  • Rating change (usually, major banks and rating agencies reveal their estimates before the market opens).
  • Sudden events.

What we can say for sure is that pre- and after-hours trading is available only for stock traders and only with certain brokers. CFD brokers offer this option way less often because of regulation and safety measures.

As for bigger players, an extended session is a perfect time for smart money to act. For example, insiders and hedge funds often use pre- and after-hours trading times to fulfill their orders via so-called dark pools (a privately organized exchange for trading securities). Dark pools allow institutional investors to trade without exposure until after the trade has been executed and reported.

After-hours trading risks

Since there are fewer participants than during regular trading hours, pre- and after-hours markets will generally have less liquidity, more volatility, and lower volume.1 This can substantially affect the price that a buyer or seller ends up receiving for their shares, so it is wise to use a limit order on any shares bought or sold outside regular trading hours.

It would help if you also minded pricing risk. Different financial institutions use multiple ECNs to execute trades. Your order gets executed with the best available price from multiple sources during a regular trading session. But at an extended session, you are limited by only one broker. Thus, the price may be worse than on the other sources. Nevertheless, such spreads between brokers may become an arbitrage trading opportunity. But more about them later.

 Of course, after-hours trading involves fewer market participants. Thus, fewer orders are placed in a market depth table. When everyone's trying to react to a news item all at once, a stock will trade wildly in the after-hours session as the market works to digest the news and discover a new price for the security. As a result, it may be more difficult for retail investors to execute an order at a chosen price. Moreover, you may be able to get a better price in the regular trading session the next day.

Benefits of after-hours trading

First of all, extended sessions offer you possibilities to trade on the news before others. Takeovers, mergers, bankruptcy filings, government reports on unemployment, and other events can move shares before (or after) the opening bell. Then, you only need to react quickly to catch the move.

And also, don't forget about arbitrage. It is a trading style that includes searching for a divergence in the prices on the very same asset on different brokers. Usually, prices tend to align (because it is the same asset, why should it even diverge?). Arbitrage traders love extended sessions because it is the only time on the stock market where arbitrage can exist for more than a fraction of a second.

To sum up, premarket and after-hours trading have their pros and cons. With the understanding of extended sessions and how to use them, you may find new trading opportunities. But be aware of the risks. Trade safely, good luck!

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