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What Is After Hours Trading and How Does It Work?

The “regular” trading hours are considered to be those that lie between 9.00am and 4pm. After hours trading intuitively enough, relates to the buying and selling of assets outwith these times. Eastern Standard Time matches potential buyers and sellers using electronic communication networks as opposed to a stock exchange. An electronic communication network (ECN) is something that allows individual investors to contact one-another electronically as well as allowing large organizations that invest on behalf of their members to interact anonymously (known as institutional investors) – helpful if they would like to hide their actions. Institutional investors were the prime users of after-hours trading until the late 20th century; the point at which electronic communication networks became more common and accessible. After-hours trading is now possible for the majority of investors via brokerage accounts. It is sometimes referred to as the “after-hours market,” or “extended-hours trading.”

After-hours trading sessions: After-hours trading runs in sessions, usually between 8am and 9:15am EST for the morning session, and between 4pm and 8pm for the afternoon/evening session.

After-Hours Trading boasts many advantages:

Investors can take advantage of the convenience of being able to trade at any time they choose. A considerable number of influential events/information releases are known to take place outwith regular trading hours as well, including economic indicators for example. Extended-hours trading sessions offer the possibility of immediate trading based on new information, as opposed to waiting for regular trading hours to implement a decision. Prices could also be more inviting during these sessions.

However, as well known with advantages often come risks:

Reduced availability of liquid assets: Given that there are considerably more buyers operation during normal trading hours, there could be less trading volume for a stock, and it could be more challenging to sell shares.

Varied pricing: the common lower volume in trading during these hours often means that it can be more difficult for a trader to obtain their order at their desired price.

Small vs big: Even though individual traders are able to trade in the after-hours market, they must face competition against massive institutional investors that have far more power than them.

Volatile: Since the extended-hours trading market is not as heavily-traded, one is more likely to witness extreme price fluctuations as opposed to those that might be seen during normal trading hours.

How does it work?

An electronic market (EM) is a service that is set up to match buy and sell orders. This means that if there are no orders for a stock that is on the EM, any investor that places an order to purchase the stock has to wait for a corresponding sell to arrive, before an order execution can take place.

Late-Day Trading vs After-Hours Market

Late-day trading and after-hours are not the same thing or in any way related. Late-day trading refers to the illegitimate purchasing and selling of stock portfolios/bonds after regular trading hours are over. The reason this differs from after hours trading is since, during after-market trading hours, stock prices still fluctuate in accordance with all normal factors (supply and demand etc). Whereas, in late-day trading, the price of a mutual fund never changes after a particular time as no other traders are allowed to trade it until the following day. This unchanging price is sometimes known as a “stale quote.” In other words, if all investors were allowed to trade the mutual fund in question, it’s price would fluctuate in accordance with normal market influences without place one trader at an unfair advantage.

Written by Nathaniel Fried

Co-founder of Fupping. Busy churning out content and building an empire.

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