Definition of After Hours Trading
The New York Stock Exchange and the Nasdaq Stock Market, according to the U.S. Securities and Exchange Commission (SEC), produce the largest volume of trading activity in the United States. As of June 2010, both market's business hours are between 9:30 a.m. and 4 p.m. Eastern time. Individual investors have the opportunity to trade through Electronic Communications Networks (ECNs) outside of this time frame up until 8 p.m. Eastern. The privilege, however, does not come without risks.
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Function
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You execute after-hours trades on ECNs. Simply put, "ECNs bring buyers and sellers together for electronic execution of trades," according to the SEC. A wide variety of traders execute trades over the nine ECNs that exist in U.S. securities markets, as of June 2010. A major portion of ECN-executed trades occur on the Nasdaq during regular trading hours. You input an order on an ECN after-hours just like you do at any other time. The ECN lists your order and seeks a match--a willing buyer or seller--for your transaction.
History
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As the SEC explains, after-hours trading is nothing new. Instinet, an ECN, has provided after-hours capabilities since 1975. Alongside overall advances in market and trading technology, after-hours trading continued to grow. Beginning in mid-1999, the SEC explains that broker-dealers began offering retail investors the chance to trade after-hours via an ECN.
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Risks
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The SEC warns investors of the risks of after-hours trading. In the after-hours market, liquidity--turning stocks into cash--can be lacking. The SEC explains that, unlike during regular market hours, there might not be a large enough number of ready and willing buyers and sellers. Some stocks receive no action in the after-hours session. Along with lower volume comes greater volatility in stock prices. This can result in you paying too much or selling a stock for too little, relative to the tighter spreads that exist with higher volume during regular trading hours. Many after-hours traders are pros--institutional investors, such as mutual fund managers--who have access to more data than most average investors.
Benefits
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Despite the risks, after-hours trading offers benefits, particularly if you are quick to react to key stock news. Chris Concannon, an executive vice president at Nasdaq, noted that many companies release earnings figures outside of regular market hours. By trading after-hours, you can trade on this news without having to wait for the stock market to open.
Pre-Market Trading
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Pre-market trading, said Concannon, offers the same primary benefit as after-hours trading--the ability to react to significant news, namely earnings reports. The pre-market, according to the Nasdaq website, occurs before the opening bell between 4 a.m. and 9:30 a.m., Eastern time. It functions the same way as the after-hours market.
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References
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