How After-Hours Trading Affects Stock Prices

The stock market is open on business days between 9:30 AM and 4 PM Eastern time. During this time, millions of people trade stocks, bonds, and other securities on the open market. However, this isn’t the only time trading happens.

In today’s highly connected world, people often want to trade stocks outside of normal market hours. Some investors get involved in after-hours trading, which happens after the market closes. After-hours trading is similar to trading during the day, but with some important differences that you have to keep in mind.

What Is After-Hours Trading?

After-hours trading is any stock trading that happens after the market closes at 4 PM. After-hours trading typically extends from 4 PM to 8 PM.

There are far fewer people trading after-hours compared to during normal market hours. This means it can be harder to find a buyer or seller if you want to trade a specific stock. It also means the spread between the highest buy price and lowest selling price may be larger.

After-hours trading requires some additional precautions compared to normal trading, such as using limit orders rather than market orders.

With a limit order, you can set a limit on the highest price you’ll pay to buy a share or the lowest price at which you’ll sell a share. Market orders simply execute at the best available price, which may be very different than you expect after-hours when there are few buy and sell offers available.

Who Can Trade After-Hours?

Originally, after-hours trading was the domain of large, institutional investors with hundreds of millions or billions of dollars under their management. As technology has advanced, after-hours trading has opened up to more investors and now almost anyone with a computer or smartphone can get involved.

How You Can Trade After-Hours

If you’re interested in after-hours trading, it’s relatively easy to get started.

First, you’ll have to find a brokerage that allows after-hours trading. There are many large brokerages that let customers do this, including Fidelity and Charles Schwab.

Once you’ve chosen a brokerage, you’ll have to open an account and deposit funds. Your brokerage may have some additional restrictions, such as filling out some forms or having a minimum account balance.

Once your account is open and funded, you’re ready to start trading after the market closes.

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After-hours trading has a few advantages that make it appealing to investors.

One is the ability to trade on new information quickly. News stories about new products, earnings information, and other developments that can affect a business drop at all hours of the day and night. If you see a news story that could have a big impact on a company’s stock price, after-hours trading lets you make a move immediately instead of waiting for the market to open the next day.

After-hours trading also tends to have fewer participants than trading during regular hours. You might be able to get a good deal from someone who is desperate to sell their shares, but having trouble finding a buyer.

It’s also convenient to be able to trade outside of normal market hours. If you’re busy during the day, having the option to place orders in the evening might be easier for you.

Risks of After-Hours Trading

Trading after-hours involves some risks that aren’t there during normal trading hours. Before you start, you should understand the risks and how to mitigate them.

One major risk is a lack of liquidity. During normal trading hours, most stocks are highly liquid, meaning there are many people looking to buy and sell shares. That means that the spread between the best available buy and sell prices will naturally be small.

After-hours, there are far fewer people looking to make trades so the spread can be higher. This may lead to your trades executing at prices far above or below the price you expect. If there is no one looking to trade the stock you want to trade, your orders might not go through at all.

This same lack of liquidity can play a role in making prices more volatile. News that affects stock prices could have a much larger impact during after-hours trading than it would during normal trading hours.

Finally, though after-hours trading has become more available to everyday traders, it remains most popular with experienced and professional investors. If you’re trading after the market closes, you’re competing with highly experienced traders which may make it harder for you to turn a profit.

How Does After-Hours Trading Affect Stock Prices?

After-hours trading, just like trading during normal market hours, affects stock prices. When you look up the price for a stock, you’ll generally find the price at which the most recent transaction occurred. When a transaction occurs at a different price, the quoted price for the stock rises or falls accordingly.

After-hours trading works the same way. If a stock closes at $100 per share at 4 PM, and a transaction happens at $105 per share at 4:30, the stock’s quoted price will change to $105. If another trade happens at $97 at 5:15, the quoted price will change to $97.

Prices are generally more volatile during after-hours trading, so the price changes may be large or happen more quickly than you’re used to seeing.

Because the number of people who participate in after-hours trading is limited, a stock typically doesn’t open at the same price that it traded at during after-hours trading.

For example, a stock that loses value in after-hours trading might see further losses as people who trade during normal market hours try to get out of their investment before their losses grow too high. Alternatively, the price may rebound as investors look to buy shares at a lower price.

Generally speaking, trades that happen after-hours have the same impact on a stock’s price as trades that occur during business hours. You just have to keep the unique features of after-hours trading, such as low liquidity, in mind, when viewing after-hours prices.

FAQs

What happens if I submit an order and there is no one to buy or sell shares?

There are fewer people making trades during after-hours trading, so it’s possible that you’ll submit an order only to find that no one is interested in buying your shares or selling shares to you.

If you submit a market order, your order will fulfill at the best available price. For example, if you want to buy shares in a stock, a market order will buy those shares from the person offering them at the lowest price. If no one has an active sell order, you’ll buy the shares as soon as someone submits a sell order.

If you submit a limit order, you’ll set a minimum price to sell at or a maximum price to pay depending on the type of order you’re placing. For example, you might want to buy 100 shares at no more than $10 each.

If no one has an active sell order at or below that price, your order will remain unfilled until someone submits one.

If the after-hours trading session ends with your order unfilled, most brokers will delete the order, meaning you’ll have to submit a new one during the next trading session.

Does after-hours trading cost more?

Most brokerages that let their customers trade after-hours do not charge additional commissions or fees for the service. However, because of low liquidity, you may have to pay more to purchase shares or sell shares for less than if you were to trade during normal market hours.

Can you trade before the market opens?

Yes, in addition to after-hours trading, investors can participate in pre-market trading, which usually runs from 4 AM to 9:30 AM, when the market opens. This gives investors the chance to make trades before the market officially opens.

Bottom Line

After-hours trading affects stock prices in much the same way that trading during normal hours affects prices.

Trading after-hours can be useful in many cases but it’s important to keep the risks in mind. Think about how low liquidity and large bid-ask spreads can affect your trading and make sure to use limit orders to reduce your risk.