The opening bell on Wall Street is prime stock market pageantry, with company executives or celebrities ringing the bell to commence trading on the New York Stock Exchange (NYSE) floor. Of course, this gesture is symbolic mainly because most brokerage firms now allow after-hours trading well before the bell rings at 9:30 a.m. on the East Coast.
What is after hours trading? Sometimes known as premarket or after-market trading, this session extends beyond traditional trading hours, allowing investors to act on late or early-breaking news before most market participants are in front of their screens.
But this isn't a cheat code to stock market gains. Trading before or after bells is fraught with unique risks that normal hours traders don't have to contend with. This article will discuss how this type of trading works and the risks (and rewards) of trading the stock market after hours.
What is After-Hours Trading?
According to Investor.gov, after hours trading is any trade outside the traditional trading session. In the United States, major exchanges like the New York Stock Exchange and NASDAQ have open sessions starting at 9:30 a.m. EST.
What time does the stock market close? It ends at 4 p.m. EST.
During the traditional market sessions, millions of individuals, investment banks, hedge funds and other institutions are trading billions of shares per day. Some of the more popular securities, like the SDPR S&P 500 ETF Trust NYSE: SPY, trade nearly 86 million shares per day on average.
Once the bell rings to end the session and close the exchanges, most investors wrap up shop for the day. But not all. Some investors trade after hours through electronic communications networks (ECNs). Instead of routing your order to an exchange (where a market maker will it take almost without question), brokers route after-hours orders to these ECNs, which attempt to match buyers and sellers based on price and size. Lower volumes mean less liquidity, so after-hours trading presents some unique challenges, which we'll discuss more in-depth below.
What is Extended-Hours Trading?
If you ask an investor, "When does the stock market close?" you'll likely get 4 p.m. EST as an answer. Technically, this isn't the correct response. While the traditional market session ends with the closing bell at 4 p.m., trading continues for hours after the bell in extended-hours trading.
The extended hours session, or trade after market, varies depending on your broker. Most investors will see a 15-minute break between 4 p.m. and 4:15 p.m. while companies prepare for after-hours earnings reports. After trading resumes, most brokers will allow trading until 6 p.m., with a few offering hours as long as 8 p.m.
If you're an early bird, premarket trading might be more up your alley than extended hours trading. The earliest premarket trading begins at 4 a.m. EST, an hour when most of the nation is still sleeping. Not all brokers offer trading at 4 a.m.; some don't begin processing trades until 7:30 a.m. or even 8 a.m. From 8 a.m. to 9:30 a.m. is known as the "normal" premarket trading session. At 9:30 a.m., the opening bell rings and the traditional market session begins.
Who Can Trade During the After-Hours Session?
Before online brokers, after-hours trading sessions were reserved almost entirely for institutions and wealthy individuals who could get a hold of their human stock broker before the 9:30 a.m. opening bell. But now that computers can match buyers and sellers more efficiently, online brokers frequently allow customers to trade before or after the bell, as long as they follow certain guidelines.
Check your broker's rules and schedule for premarket and extended hours when trading after-market hours. The rules for trading after hours are generally the same as normal hours, except only limit orders can be placed during the pre and post-market sessions. If you attempt to place a market order, it will sit unfilled until the next normal trading session begins.
How After-Hours Trading Works
Here's a brief rundown on the after-hours trading process. If you're trading in the premarket session, your first opportunity will come at 4 a.m. EST when brokers begin processing orders through ECNs. Trading at this time is usually very illiquid, and large orders can frequently sit unfilled or partially filled. Lower liquidity is always a theme with after-hours trading, but as you might imagine, it's about as low as it gets at 4 a.m. on the East Coast.
You can only place limit orders in after-hours trading since ECNs look to match buyers and sellers based on exact sizes and price. For example, if you want to buy 100 shares of a particular growth stock at $10 per share, the ECN will need to find a seller looking to part with 100 shares at $10 per share. Since liquidity is low, bid/ask spreads are higher and large orders could go unfilled since limit orders don't allow for slippage.
Schedule for After-Hours Trading
The schedule for trading the market after hours depends on the broker and exchange you use to facilitate your investments. For example, Webull and Robinhood are two of the more popular trading apps among young retail investors, but they have different schedules for premarket and post-market trading. Robinhood investors can begin premarket trading at 8 a.m., but Webull allows clients to trade as early as 4 a.m. Here's a rough outline of the trading schedule, although you'll need to confirm these with your broker (all times Eastern Standard Time).
- Premarket trading: 4 a.m. to 9:25 a.m.
- Standard U.S. stock market hours: 9:30 a.m. to 4 p.m.
- After market trading: 4:15 a.m. to 8 p.m.
How Trading After Hours Affects the Opening Price
Companies almost always release earnings numbers before or after the traditional market session closes. Earnings releases don't always create price volatility, but if a company beats or misses estimates by a significant margin, its stock price could see some wild swings. And since this occurs outside normal trading hours, most traders won't be able to get an order processed before it occurs.
However, if you're trading indices like SPY, you probably don't need to worry about missing all action if you don't trade after hours. According to this study, normal market and after-hours market returns can vary drastically from year to year, but there's no consistency in performance. Some years are better for normal hours, other better for after hours. (Although after hours did outperform normal hours seven out of 10 years between 2009-2019).
Example of After-Hours Trading
If you want to trade after hours, you're likely trying to profit from a volatility catalyst like a news item or earnings beat. But one of the problems of after-hours trading is the limited liquidity, so you'll want to select a stock that can be both volatile and liquid.
One example of volatile and liquid is Tesla Inc. NASDAQ: TSLA, which often makes big after-hours moves on news events or earnings reports (like Elon Musk's recent visit to China). Tesla also has ample liquidity, with an average of over 155 million shares traded daily.
If you want to trade Tesla after hours, one strategy is to follow the earnings release and listen to the conference call. Stocks are often volatile as news and numbers are interpreted, so the first move isn't always correct. If the stock drops on a poor topline number but news of elevated guidance trickles out of the conference call, you might be able to add a position in Tesla shares before the rest of the market can react to the positive forecast.
Pros and Cons of After-Hours Trading
How does after-hours trading work to enhance your portfolio? Here are a few benefits, along with three drawbacks to consider.
Pros
The benefits of after-hours trading include:
- Taking advantage of late-breaking news: Publicly traded companies often drop major news stories or press releases outside normal trading hours. But these catalysts usually still occur during pre and post-market trading, which allows investors to immediately react to the news and take (or unload) a position. For example, if a company announces a dividend increase, you can add to a position after hours before most of the investment crowd.
- Trade through earnings report volatility: Companies generally release earnings reports about an hour before the opening bell or 15 to 30 minutes after the closing bell. Stocks can be extremely volatile during earnings releases as the market digests the information. For example, traders who bought shares of NVIDIA Corp. NASDAQ: NVDA right as the company's May 2023 earnings report released were able to capture a 25% gain in less than an hour. Occasionally, a stock will pop higher on the initial numbers and then decline once details and guidance are released, which offers two different trading opportunities in the same conference call.
- Can buy or sell before or after work: When does the stock market close? It closes before 4 p.m. EST, usually well before most Americans finish their workday at a traditional 9-to-5 job. After-hours trading allows investors who work long days in high-stress jobs to actively buy and sell stocks when they leave the office, even if the closing bell has already sounded.
Cons
The downsides can include the following:
- High volatility: After-hours trading can be volatile, especially in stocks with limited liquidity, which probably doesn't sound too appealing if you don't have a high risk tolerance. Volatility is a two-way street; losses can compound just as fast as gains.
- Limit orders only: You'll need to set your price through a limit order since market orders won't be processed until the next normal trading session begins. Limit orders help prevent slippage and result in partial fills, where the investor only gets a handful of their intended shares.
- Tight liquidity: The biggest drawback of after-hours trading is the liquidity concerns. Stocks with low liquidity can be difficult to exit, possibly leaving you holding plummeting shares with no way to offload them until the exchanges open again.
Why Does After-Hours Trading Help You?
After-hours trading can be helpful if you can quickly parse financial data and gain insight from conference calls. Beating the market is tough, but you can occasionally get ahead of the crowd by reacting quickly to a catalyst that occurs after hours. And let's face it, most of them do.
Most individual traders can't consistently beat the market, but they can outperform if they get to the winners before most of the crowd.
Know the Risks and Rewards Before Engaging with Markets After Hours
After-hours trading carries risks that normal trading usually does not, such as low liquidity and partial order fills. Since volume dries up after the closing bell, it's often more difficult (and expensive) to process trades.
These risks come with rewards, too, like the chance to beat the crowd to a skyrocketing stock that just announced a massive earnings beat. As always, you must balance risk and reward to achieve success.
FAQs
Here are a few frequently asked questions about after-hours trading:
How does after hours trading work?
In after-hours trading, orders are processed by ECNs instead of exchanges, where buyers and sellers are matched up based on the price and size of the limit orders they've placed.
Is after hours trading good or bad?
After-hours trading is neither good nor bad. It's just a different kind of operation than normal-hour trading. Liquidity is lower, so risk (and spreads) are higher, but the ability to move first on catalysts is worth it to some investors.
Why do you trade after hours?
What are the stock market hours? In the U.S., it's 9:30 a.m. to 4 p.m. EST, which often means active traders work while the normal market session operates. After-hours trading allows you to trade on your own schedule while taking advantage of earnings volatility or late-breaking news items.
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