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What is After Hours Trading and how does it work?

Traditionally the stock market has been a frantic hive of manic activity and high tension between the typical working hours of 9.30 - 4, then pretty much deserted until the whole thing starts again the following day. However, things are a little different these days, and although it’s unlikely we will see a 24/7 hour buzz of financial activity any time soon there is definitely something going down, and people with making money on their mind are always around, in the shadows.

Okay, well maybe not exactly lurking it the shadows like some low-budget made for TV movie – after all, there’s absolutely nothing sinister or illegal about trading on the stock market after the close of day. It may not be the busiest time of the day but there are plenty of people who specialize in what is known as ‘after-hours trading’.

What is After Hours Trading?

Technically this refers to all trading in the sector of financial securities which takes place after the official 9.30 am to 4 pm EST New York Stock Exchange trading hours. Most after-hours trading occurs between the hours of 4 – 8 pm EST, and this is not to be confused with the ‘pre-market’ trading which can take place from around 4.40 am until the market opens officially for the day. (Sometimes both are referred to as extended trading hours.)

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In the past this was mainly the domain of experienced brokers but as technology has changed the way we live, and smartphones or tablets allow instant access to so much of the world, whenever and wherever we like, it’s so much easier to get involved with things like trading that were out of reach in the past.

Here’s how it works

It’s computers which have made after-hours trading possible, as they work through machines called Electronic Markets. These operate as order matching machines, sorting through orders to buy and sell and making matches where it can. So say you want to buy 100 shares which cost $10 each. The computer system searches for any orders to sell 100 of those shares have been logged, completing the order if so.
Not all types of orders are allowed in after-hours trading times. The simplest option available is to buy shares online through a share dealing platform. Most platforms let you purchase shares from any company listed on the stock exchange, but other share-trading platforms may only let you buy a limited range of stocks.

·         Limit orders to buy, sell, or short are all fine.

·         Stop, and stop-limit orders, along with any order with a special condition attached cannot be placed.

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Orders placed during after hours sessions cannot be carried over into another session.

Brokers who deal with after hours trading may have special limitations on the timing of things, for example they may take order for the entire four hour window, or take them from 4 but not execute anything until a little later.

The after-hours market can fluctuate just as much as the regular market, as of course, the rules of supply and demand apply just the same. So when the market is top-heavy with buyers you can expect to see stock prices rising, and falling if the sellers outnumber buyers. It’s a good idea to keep an eye on the Nasdaq 100 Afterhours indicator, (sister to the Nasdaq 100 price index which is in use during regular market hours), to monitor the health of the current market.

Why do people bother with after hours trading?

There are a dozen reasons why this is so, including:

·         The convenience. There is more time to make decisions, which suits a lot of people who are too busy to focus on trading during the regular opening hours.

·         The chance to make some quick cash. This is especially the case if you follow the news and current affairs closely as developments such as new contracts or unexpected losses which affect stock prices often happen outside of the 9.30 – 4 period.

·         The thrill of doing something different.

Are there any special rules or restrictions to after hours trading?

Not all brokers offer after hours trading services, and when they do the commission tends to be a little higher than it is for regular trading hour transactions. It may only be a little higher in most cases, but for those looking to move a lot of cash through the market these costs can soon add up, and should be factored into daily or weekly spending budgets.

What are the risks of after hours trading?

After hours trading is, like any form of wagering, a practice which carries risk, so it is wise to be aware of these. Some of the major risks are:

·         Not getting the best possible price – ask your broker how they work this. Sometimes it’s unavoidable as the market is obviously quieter and the amount of possible trading partners is scarcer.

·         Volatile pricing – securities can rise and fall in value much more dramatically during after hours trading than regular times.

·         Losing out to experienced traders - which is especially a risk for those who are largely hobbyists.

·         Rushing into decisions – act in speed and repent at leisure is a good saying to keep in mind as impulse decisions on what looks like a potentially good deal could easily burn your fingers. Better to hold back a little before rushing into things.

Is after-hours trading something you could do well with?

There are no guarantees in any stock market transactions but it is fair to say that there are some great deals to be had during after-hours trading if you are willing and able to take the risks. However, if your style is more about long term investment and low risk then it probably isn’t the best thing to get involved with on a major scale. Either way, it’s always best to talk to an experienced broker or financial advisor to get a clear idea of what it is all about.