What is After Hours Trading and How Does It Work?
After Hours Trading Definition
It begins at 4 PM US Eastern Time and can run as late as 8 PM.
This trading is conducted through electronic communication networks, or ECNs, rather than traditional stock exchanges, like the NYSE, or New York Stock Exchange.
How Does After Hours Trading Work?
After-hours trading is available for investors to utilize when news breaks after the close of the regular trading session which occurs between 9:30 AM and 4 PM Eastern Time.
For example, if a company’s earnings report is released after hours, it may prompt investors to buy or sell a stock.
Although a spike in volume may occur initially with the release of news, trading volume will usually thin out as the session progresses, often by 6 PM.
Risks Associated with After Hours Trading
After hours trading comes with some drawbacks.
Because there are less participants during after hours trading, investors will deal with “thin markets.”
The inefficiency created by fewer participants also creates a larger “bid-ask spread,”or a bigger gap between what buyers are willing to pay and sellers are willing to sell for.
Paying slightly more when buying and receiving less when selling, along with the illiquidity and volatility created by fewer market participants, are drawbacks of after hours trading.