The opening and closing bells on the major American stock exchanges ring at 9:30 am and 4:00 pm respectively (Eastern Time). If you cannot pack enough trading thrills into that six-and-one-half hour stretch, or your 9-to-5 job does not allow you the freedom to do your own trading at home, you are in luck. After-hours trading is available on the New York Stock Exchange (NYSE) and NASDAQ, as well as on other market exchanges throughout the world.
In the past, after-hours trading was limited to a privileged few. Only institutional investors and investors with very high net worth were allowed to engage in trades after the closing bell. That changed with advances in technology and the advent of Electronic Communication Networks (ECNs). Late-night and early-morning (pre-market) trading is now open to anyone who has access to an ECN through his or her broker.
Stocks do not always open at the same value they closed at during the previous day, and after-hours trading is the reason why. News that can affect the value of any particular stock, or stocks in general, can break after the market has closed for the day. Examples range from a sharp rise or drop in overseas markets to a fire at a company's manufacturing facility or a late-in-the-day earnings announcement. Investors want to capitalize on this news before it spreads and the next day's trading opens. After-hours trading allows savvy investors to do just that.
After-hours trading is not for the novice investor. The volume of trading is considerably lower during the off-hours, making it harder to find a trading partner — especially if the majority of activity in that market is headed in the same direction based on late-breaking information. Because of the lower volume, it may be more difficult to complete trades or do so at a reasonable price — price volatility is higher and the differences between bid and ask prices (spreads) may be wider. Liquidity is another issue; it may be harder to convert shares into cash. Certain stocks may not be available for after-hours trading if interest in those stocks is typically low.
Usually after-hours trading is heaviest during the first two hours after the market closes, falling off sharply beyond that. The further away you trade from these boundaries, the more likely you are to experience volatility and spread issues.
Individual brokers have their own rules about when after-hours trading is accessible to their clients. There may be extra fees and other limitations involved. For example, many brokers restrict after-hours trading to limit orders only, where you set a limit price under which you will not sell or above which you will not buy. This protects under-informed traders from receiving a poor price for their transactions. Such transactions may be cancelled or carried over to the next day's trading, depending on the broker's policy. Check your broker's rules carefully as well as the exchanges' after-hour trading rules to avoid unpleasant surprises that could cost you money.
Before you consider engaging in trading in the off-hours, be honest about why you want to trade at that time. Is it because that is the only time available to you to manage your accounts? Do you think you can spot bargains and take advantage of late-breaking news? Are you just a trading junkie that lives on the adrenaline of the market?
Keep in mind that after-hours trading is still the domain of large net worth and institutional investors with more resources than you have, as well as other individual investors with the same motivations as you. If you do the necessary research and decide that trading after-hours is for you, invest with a solid plan and stick with limit orders even if you have other options. Reactive impulse buying is usually a bad idea during regular trading hours, and the effects can be even worse in after-hours trading. Good luck and stay focused!
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Originally Posted at: https://www.moneytips.com/after-hours-stock-trading-101