The Upsides and Downsides of After-Hours Trading

Every trader knows when the markets open and when they close, no matter where they live in the world. However, did you know you can also trade after-hours? Let’s look at some of the upsides and downsides to both.

What Is After-Hours Trading?

Let’s start here by planting a foundation. A lot of people think that this kind of thing has a nefarious bend to it. They imagine men in trench coats meeting in dark parking lots to exchange trades far from where the SEC can keep an eye on them. In reality, there’s nothing inherently illegal about after-hours trading. As you may already know, the stock market opens at 9:30 a.m. EST and closes at 4:00 p.m. These are the regular business hours for almost every major market, including the New York Stock Exchange and the NASDAQ.

Anything that happens after that final bell is considered after-hours trading. In order to make trades during this time, investors have to use ECNs (Electronic Communications Networks). These systems are registered with the U.S. Securities and Exchange Commission (SEC). Brokers and investment firms subscribe to their services so that they can facilitate trades between buyers and sellers without the help of the major markets.

The Downsides

Right off the bat, this might sound great. It essentially means that you never have to stop trading, which is what a lot of hardcore investors dream of. However, you have to remember how any stock market works. When you purchase shares during regular hours, you are presented with a consolidated price, which is based on available prices found across different stock exchanges. If you trade after hours, though, you’re only getting to see the prices available through the ECN. In short, this means you’re not always getting the best price.

Then you have to consider that ECNs can only match the price you want with someone who is willing to buy or sell at that amount. If you’re trying to sell a stock, but there’s no buy order out there to match it exactly, you’re going to be waiting for regular hours.

These limitations don’t just affect your trades, but the stocks too. They hurt their liquidity because you can’t just sell them whenever you want after hours.

The Upsides

For some traders, the major upside of after-hours trading is that it’s the only time they can possibly get in on the market. If you’re working a full-time job, but still want to trade, you’re going to have to wait until the market closes. This is especially true for those on the West Coast, who begin trading at 6:30 a.m. and then stop at 1:00 p.m. Lastly, if important news breaks about a company, you probably don’t want to wait to act on it until the morning. With after-hours trading, you can move on that info immediately and potentially profit or avoid bigger losses.

After-hours trading is neither positive nor negative. However, it’s important you know how it works because, as you can see, there are many factors to consider.