How After-Hours Trading Affect Stock Prices

After-hours trading is defined as stock and ETF trading that takes place after the regular market has closed. For a variety of reasons, including in response to news or data releases that happen after the close, it enables investors to purchase and sell shares outside of regular trading hours.

 

Through electronic communication networks (ECNs), which connect prospective buyers and sellers without the use of a traditional stock market, trades are conducted during the after-hours session. Compared to full exchange trading, these platforms typically have reduced liquidity, which increases volatility and causes bigger price moves on lower trade volumes. We have discussed the potential and hazards that are presented here. 

 

•    Trading that takes place after usual market hours.

 

•    Electronic communication networks (ECNs) rather than conventional markets are used to match buyers and vendors.

 

•    Due to the lower volume of participants, after-hours trading is more unpredictable and risky than trading during regular trading hours.

 

•    Trading volumes and liquidity may be significantly lower than during regular business hours as a result.

 

•    The opening price of a stock the next day may change significantly from the price at which it ended the day before due to after-hours volatility. 

 

The majority of investors are aware that the major stock exchanges have specified hours each day during which trading can take place. Between 9:30 a.m. and 4 p.m. ET, the New York Stock Exchange (NYSE) and Nasdaq in the United States conduct regular trading, with the first trade in the morning establishing a stock's starting price and the last trade at 4 p.m. establishing the day's closing price. 

 

However, trade also takes place outside of certain hours. Trading after hours has been practiced for a long time, but historically it has only been available to institutional and high-net-worth investors, such as mutual funds. However, after-hours trading is now accessible to private investors thanks to the development of ECNs. 

 

Members of the Financial Industry Regulatory Authority (FINRA) may freely enter quotes during after-hours sessions as long as they abide by all applicable limit order protection and display restrictions, including the Manning Rule and SEC order-handling guidelines. The 3 Trading Sessions for Stocks:

 

•    Pre-market trading occurs between 4 and 9:30 a.m. ET.

 

•    The normal market is open for business from 9:30 AM to 4:00 PM ET.

 

•    From 4 pm to 8 pm ET, the after-hours market is open for business.

 

Shares are traded between parties at a predetermined price, the pre- and after-hours markets operate similarly to the normal market. In other words, you will pay whatever someone in the pre-market or after-hours market is ready to pay.

 

NOTE-If important news is announced after the stock market has closed, after-hours trading may increase.

 

In the past, institutional investors could trade shares outside regular market hours while the individual investor could only do so during regular market hours. However, with to the growth of the Internet and ECNs, markets are now more open than ever, and traders are allowed to participate in extended hour’s sessions. This has been a move in the direction of allowing stock traders to do transactions around-the-clock. 

 

Another move in this approach was made in 2018 when TD Ameritrade modified its platform to enable 24-hour trading of specific exchange-traded funds (ETFs).

 

In the after-hours market, buyers and sellers can only submit limit orders (not market orders) to purchase or sell shares. Based on the prices specified in the limit orders, the ECN then matches these orders. 

 

Due to decreased trading volumes and consequently somewhat wide bid-ask spreads in the after-hours market, limit orders help minimize the danger of getting "filled" at an unfavorable price. On the other hand, if the stock doesn't trade at the price stated in the limit order, investors might not even get their orders filled.

 

Pre- and after-hours markets typically have less liquidity, more volatility, and lower volume because there are fewer participants than there are during regular trading hours. It is customary to use a limit order on any shares purchased or sold outside of regular trading hours due to the relative illiquidity of the market, which can significantly affect the price that a buyer or seller ultimately receives for their shares.

 

Price changes on the after-hours market typically affect stocks in the same way that price changes on the regular market do: 

A $1 increase in after-hours market is equivalent to a $1 increase in the regular market. You would have suffered a $1 loss during the day's session (from $10 to $9), but because prices rose $1.50 in after-hours trading, you would be sitting on a $0.50 per share gain. For example, if you own a stock that drops from $10 (your purchase price) to $9 during the regular day's trading session, but then rises by $1.50 to trade at $10.50, you will have experienced a $1 loss during the day's session (from $10 to $9).

 

The stock may not necessarily open at the same price it closed at in the after-hours market when the normal market opens for trading the following day (when the majority of individual investors will have the chance to purchase or sell). For instance, a company's stock price may rise in the after-hours market if it releases a strong quarterly earnings report after the market closes. 

 

However, after analyzing the specifics of the earnings release, institutional and retail investors can find that the company's performance was not as strong as it originally seemed. Consequently, there may be more sell orders than buy orders when the market opens, and this selling pressure may cause the stock to open at a price significantly lower than where it traded at the close of the previous day or in its after-hours market.

 

When fresh information is revealed after the normal market has closed, the price movements in the after-hours market can be used to illustrate how the market responds when regular session opens. 

 

Trading after hours is possible from 4 to 8 p.m. ET. From 4 to 9:30 a.m. ET, pre-market trading is accessible.

 

By entering into your brokerage account and choosing the stock you wish to trade, you would trade just as you would during regular business hours. The only distinction is that, as opposed to the kind of market order you may make during routine trading, you will need to use a limit order to buy or sell the stock. 

 

Be aware that stock price movements may be more erratic and bid-ask spreads may be greater than they are during regular trading hours. 

 

After the market closes, a lot of corporations issue their quarterly earnings reports. On sometimes, news that affects the market breaks after regular trading hours. Investors and traders can benefit greatly from being able to respond to these changes outside of usual business hours, particularly if they wish to close out a long or short position. 

 

For example, a trader with a long position might prefer to close it out at a loss in the after-hours market rather than take the chance of holding it overnight and suffering greater losses the following day. 

 

After-hours trading attracts a smaller audience than it does during regular trading hours. Less trading volume and liquidity due to fewer participants’ results in larger bid-ask spreads and higher volatility.

 

If your limit order has not been filled, it will be cancelled and you will need to submit a new order for the regular trading session the next day because after-hours orders are only valid for that session. 

 

While regular trading hours on the market end at 4 p.m. EST, stocks can and frequently do so. Even though investors and traders who want to trade news like earnings announcements that are released after the closing may benefit from participating in after-hours markets. However, trading after hours might come with a number of risks. 

 

This is because these markets frequently have lower levels of liquidity and are susceptible to significant price changes on small volumes. Anyone engaging in after-hours trading should be aware of these dangers.