The term “after hours trading” may bring to mind images of sharp-dressed investors and brokers meeting furtively in shadowy corners to share thoughts, predictions and secrets about the stock market. In reality, it’s not quite as secretive or adventurous as it sounds. But before you consider after hours trading, you’ll need to know how it works.
Stock market action usually occurs between 9:30 a.m. and 4:00 p.m. Eastern time, regular business hours for major markets including the New York Stock Exchange and the NASDAQ Stock Market. Anything that happens afterwards is considered after hours trading, facilitated by computerized trading systems known as Electronic Communications Networks (ECNs). ECNs are registered with the U.S. Securities and Exchange Commission (SEC) and subscribed to by brokers and investment firms and automatically match buyers and sellers and execute transactions.
Night and Day
There are two primary differences between day trading and after hours trading. When you purchase stock during regular hours you are purchasing it at a consolidated price based on available prices across the different stock exchange markets. With after hours trading you only get to see the price available through your ECN and it may be lower through another. There are also limitations in after hours trading as ECNs are only able to execute transactions that they can match. If there isn’t a buy order for the stock that you want to sell, you’ll have to wait for regular hours.
The limitations posed by after hours trading reduces the liquidity of stocks. During regular business hours, you can quickly sell shares for cash, but that isn’t always the case after hours. You also run the risk of spending more than you should or not making as much as you could because you don’t have access to consolidated prices across all exchanges. You’re stuck with the price available through your ECN. Obviously, after hours trading is done via computer and as with any technology medium, interruptions, glitches and errors can occur. Technical malfunctions can impede your transactions through delays or denying them altogether.
After hours trading is advantageous if you work during the day and are unable to participate in regular stock market hours. People on the West Coast may find after hours trading beneficial because due to the time difference, as their trading has to be done between 6:30 a.m. and 1:00 p.m. to fall within regular stock market hours. After hours trading also gives you a head start buying or selling stock based on company news or earnings reports released after regular hours.
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