What is after-hour trading?

Trading outside of the regular trading hours used to be restricted to high net-worth investors and institutions, however, modern technology has changed that.

Understanding after-hour trading

When people begin to invest in the stock market, they quickly learn that standard stock market hours dictate when the different markets around the world are officially open. For example, the New York Stock Exchange and the NASDAQ are open between 9:30 am and 4:00 pm Eastern Time. During this window, people can quickly buy and sell stock according to the demand.

However, sometimes investors wish they could trade after the official regular trading session. When making trades outside of the traditional market hours, the process works similarly to the standard market trades. The buyer and the seller agree to the sale of the particular stock. However, since fewer people are trading outside of the standard market hours, there is generally less liquidity in the stocks and a wider bid-ask spread, impacting the stock's selling price. Many traders find that trading outside of typical hours can create more volatile prices that rise and fall more sharply, thus requiring limit orders.

Since fewer people are trading outside of the standard market hours, there is generally less liquidity in the stocks and a wider bid-ask spread; many traders find that trading outside of typical hours can create more volatile prices that rise and fall more sharply.

How does after-hours trading work?

Trading outside of the regular trading hours used to be restricted to high net-worth investors and institutions. However, modern technology has now opened pre-market trading and after-hours trading to everyone. Now, just about any trader can trade while the stock market is technically closed through the electronic communications network or ECN. These electronic systems will match orders with the stocks available and allow investors to make their trades.

Those interested in making the trades should plan on using limit orders because of the higher volatility of the market. The limit order is designed to only fill the order at a price specified on order instead of the price at the moment. The order will then only be filled when the stock matches this target price. This order helps to protect the trader in case a price rises or falls suddenly. If this sudden rise or fall happens when a person is in the middle of a transaction, they might find themselves with a purchase at a price they had not intended, thus potentially resulting in severe losses.

What time is after-hours trading?

Outside of the regular trading hours of 9:30 am to 4:00 pm Eastern Time, investors have the option of making trades in the pre-market hours and the after-hours. The pre-market trades can be made between 4:00 am and 9:30 am Eastern Time, while the after-hours trading session runs from 4:00 pm to 8:00 pm Eastern Time.

How does after-hours trading impact the market?

Investors should have a firm understanding of how after-hours trading impacts the standard stock market. The trades completed in the pre-market hours and the after-hours market do not automatically dictate the opening price of a given stock, though they may influence it. The opening price is determined by the first purchase of the day on that given day. Therefore, just because a stock sees a dramatic rise or fall during the after-hours trading time, it will not necessarily open as high or low as during non-standard trading hours. 

The trades completed in the pre-market hours and the after-hours market do not automatically dictate the opening price of a given stock, though they may influence it.

How do I get started with after-hours trading?

Those who understand how the market works, and the opportunities available in after-hours trading, may want to get involved with this trading strategy — and here is what you need to know.

Step 1. Find a brokerage platform that allows you to make after hours trading

Find a brokerage that will help you trade outside of the standard stock market hours. This makes the entire process simple for customers to trade in their non-market hours as easily as they do for regular market hours. Since these customers have just one platform to use for both their standard trading options and their after-hours trades, they can also easily monitor their progress across different stocks as they continue to study and improve their performance.

Step 2. Keep a close eye on your preferred stocks 

Stock sold during after-hours and pre-market hours often becomes more volatile, and fewer people buy or sell the stock. Trading during these non-standard hours requires a considerable understanding of the market and how stocks react to different types of market news during this time. Investors new to trading outside of the traditional market hours might find it helpful to engage in some paper trading to get started.

Step 3. Remain up to date on the latest news and announcements 

Many traders like the potential of after-hours trading because they can quickly react and respond to the latest news and events impacting the industry. Since this will provide a key opportunity for traders to secure highly coveted stock, you want to make sure that you regularly keep yourself up to date on the latest news so that you know when these opportunities arise and you can take advantage of them.

Step 4. Keep a close eye on your stocks as you move forward

Do not forget to regularly monitor your stocks both through the regular market hours and the pre-market hours and after-hours trading times. Taking time to regularly check your portfolio and the market will help you better understand the behaviour of the stock, your performance, and the optimal times to buy and sell so that you can improve your investment strategy.

This article is for educational purpose and not to be regarded as investment advice, a recommendation, or an offer or solicitation to subscribe for, buy or sell any investment product. All forms of investments are subject to risks, including the possible loss of the principal amount invested. Losses can exceed your initial deposit. You should carefully consider your investment experience and objectives, financial situation, and risk tolerance level, and consult an independent financial adviser prior to dealing in any investment products. The contents in the article may have been obtained or derived from public or other sources believed by CMC Invest to be reliable. However, unless otherwise specifically stated, CMC Invest makes no representation as to the accuracy or completeness of such sources or the information, and accordingly accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. Please visit www.cmcinvest.com/en-sg/ for important information. This advertisement has not been reviewed by the Monetary Authority of Singapore.