The stock market in the U.S., composed of the New York Stock Exchange (NYSE) and the NASDAQ, have regular trading hours from 9:30 A.M. to 4:00 P.M. Eastern time on weekdays. However, they are closed on days that the stock market designates as holidays. The holidays that are typically observed each year include New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Often, the market will close early on the day before or after these holidays. For example, Black Friday is the day after Thanksgiving and the market will typically close at 1 P.M. that day. This also typically happens if Christmas Eve falls on a weekday.
After-hours trading was first introduced in 1991 by the NYSE, allowing traders to trade an extra hour and fifteen minutes after the market closed. Nowadays, after-hours trading varies from broker to broker, but is typically some subset of the timeframe from 4 P.M. to 8 P.M. After-hours trading presents unique opportunities for reward, but it comes with unique risks as well.
Many companies make significant announcements after the regular session ends, which can have a dramatic effect on trading in the stock. In after-hours trading, the number of traders is fewer, which reduces the volume and can cause more dramatic moves. If one large firm takes a large position, it could have a tremendous effect on the stock’s price during such low volume. These moves, however, can be easily washed away when the regular trading session opens the next day.
News trading always carries significant risks. This is true even during regular trading hours. But in after-hours trading, the bulk of investors and analysts are not paying attention to the market. For this reason, the interpretation of events in after-hours trading may be dramatically different from the conclusions arrived at when the regular trading session opens the next day. That’s when the more experienced analysts and traders come to work and begin digging into the earnings reports and the details behind the after-hours announcements and news bites.
Another thing to consider with after-hours trading is that the volume is much less and, therefore, the spreads will be much wider. This means that fees will increase. That is not to say that it isn’t worth the extra fees to be able to trade at those times. But one shouldn’t just casually trade after hours without considering that it will cost you more in overhead than buying stocks during regular trading hours.
After-hours trading is a different animal than regular trading hours. New traders must master the regular trading session before diving into after-hours trading. After-hours is not simply a few hours added to the end of the regular trading session. There are significant restrictions imposed by brokers. Order types are typically restricted to market and limit orders. Securities such as options, bonds and mutual funds may not be available. Also, orders placed during the after-hours session are only good for that session. They do not carry over into the regular trading session.
When you buy a stock in after-hours trading, that date is used for recording purposes. This means that if you buy a stock in after-hours trading before the stock's ex-dividend date, that date still counts in terms of the record date for the dividend. This makes after-hours trading a great thing if you happen to forget to buy a dividend-paying stock during the regular session on the day before the ex-dividend date, which is the date the stock must be purchased by to qualify for the dividend.
Although risky, sometimes it can be quite profitable to buy a stock in after-hours trading—so profitable that the increased fees are worth it. Companies often release earnings or significant news that can make a stock really pop. Getting in before the bulk of the market finds out in the morning can be a great head start for the next day.
After-hours trading allows you to buy and sell stocks after the regular trading session has ended. But bear in mind that it is not simply a few hours tacked on. Order types, the kind of securities you can buy and the lifetime of your order are restricted. Furthermore, the lower volume during these times increases the fees that you have to pay per trade, which can affect your bottom line.
After-hours trading exists for a reason and it is good to know it is there once you have mastered the complexities of the regular trading session. Earnings and significant company announcements are often released during after hours, allowing you to take advantage as quickly as possible.