What is After-Hours Stock Trading?
As a stock trader, one of the most important things that you need to know is when to show up to trade and when to leave.
Most investors and traders are familiar with the standard trading hours of the major US stock exchanges but few are aware that trading can still occur outside of those times.
While trading outside of regular hours has been around for some time, it was only available to high-net-worth clients and institutional money, however, the rise of electronic communication networks (ECN’s) has enabled retail traders around the globe to also participate in after-hours trading!
After-hours stock trading provides traders and investors with the opportunity to buy or sell securities outside of regular trading hours – it starts at 4 pm EST once the major US stock exchanges close and runs until 8 pm EST.
How does After-Hours Stock Trading Work?
After-Hours trading works exactly the same way as trading during regular business hours in the sense that traders and investors are able to buy or sell securities, however, there are a couple of differences to keep in mind before starting.
The most notable difference between trading after-hours and during regular hours is the amount of volume being traded.
The amount of volume traded after-hours is generally a lot less than what you can expect during regular trading hours – more often than not, after-hours trading volume tends to dry up by 6 pm EST.
To help better illustrate the difference in volume between these two sessions, take a look at the below screenshots showing the traded volume for the ticker AAPL (Apple Inc) on October 19, 2020.
When we reference the second example, we can see that only 2.7 million shares of AAPL were traded outside of regular hours representing about 2% of the morning session’s volume!
Another thing to consider when trading after-hours is the stock price, more specifically, the spread between the bid-ask. Since there are a lower amount of shares being traded after-hours, the bid-ask spread tends to widen significantly and can result in some poor order fills for the inexperienced trader.
The last thing to note is that it is much easier to push prices higher or lower with fewer shares during after-hours trading simply because of the lack of volume and wide bid-ask spreads so there is a substantial risk, especially when trading illiquid stocks.
Who Can Trade During The After-Hours Session?
As we mentioned earlier, after-hours trading used to be accessible only to high net worth clients and institutional investors, however, these days most retail brokerages provide traders and investors with access to the after-hours markets.
The ability to trade after hours, as well as the policies and fees around it, vary depending on different brokers – below you will find an example from Questrade brokerage:
The above image reflects Questrade’s policy on trading during the pre and post-market sessions; as you can see, the cut-off time to submit orders outside of regular hours with this brokerage is 5.30 pm EST.
In addition to this, only limit orders can be submitted for after-hours trading and they have to follow specific conditions (choosing a certain ECN and duration for the order).
As you can see from the example provided, there is no one size fits all and if you are considering trading outside of regular hours, we highly recommend contacting your brokerage for more information on their policies and fees!
Why Would You Trade Stocks After-Hours?
The main reason that a trader or investor would consider trading stocks after-hours is to take advantage of market-moving events released after the closing bell before the regular markets can react.
These kinds of events include releases such as earnings reports, economic reports, geopolitical events, bankruptcy filings, mergers, and takeovers, etc.
Another reason one might trade stocks after-hours is simply for convenience’s sake; they may be tied up with other commitments during regular trading hours and trading after-hours provides added flexibility.
Real-World Example of After-Hours Trading
International Business Machines (IBM) reported Q3 2020 financial results on October 19, 2020, after the closing bell.
As you can see on the chart below, throughout the morning session prior to the earnings release, IBM traded relatively flat and posted a closing print at $125.53 for the US session close.
The earnings results came in at a sizable miss (~ 27% below analyst expectations) after the closing bell and the stock price dropped to $122.00 by the close of the after-hours session, representing a loss just under 3% after the release of the earnings report.
During the pre-market session the following morning (highlighted in yellow), IBM shares continued their decline and closed on their pre-market lows at $119.86 ahead of the US market open.
The opening print on the US open was $119.80 and IBM stock continued to sell-off another 2.30% before finding temporary support at $117.00 for the remainder of the session.
Overall the stock price of IBM dropped around 6.75% since the earning’s report came out after the closing bell, with almost half of the move down occurring outside of regular trading hours!
While there are certainly opportunities to profit on significant news events during the after-hours trading session, traders are vulnerable to low liquidity and wide bid-ask spreads that can add to the risk of doing so.
Before considering trading stocks after-hours, we encourage traders to practice and build confidence and consistency in their trading strategy during regular market hours!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.