How Do Stocks Trade After Hours?
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After Hours
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Regular trading hours for U.S. stock are 9:30 a.m. to 4:00 p.m. Traders might notice, however, that share prices can and do fluctuate after the bell rings and regular trading closes. This is because the after hours session continues for another several hours. Even though the stock specialists that serve as market makers during the regular session go home for the day, electronic communications networks make trading possible without any human intermediary. Where once upon a time after hours trading was only available to large institutions, today any retail investor can access the after hours market through their regular discount broker.
Order Restrictions
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The hours of the late session will vary for different brokers, but most continue until 8:00 p.m. Trading during this kind usually consists of two types. Open orders at the time of the 4:00 p.m. close remain actionable until 5:00 p.m., at which point if there are corresponding orders, the trade will be executed. Otherwise, only limit orders can be placed. A limit order is one in which a buyer or seller sets a price at which they want the trade to take occur. This is in contrast to a market order, which is executed at the going rate when it is received by the market maker. In after hours trading there is no market maker, so only perfectly matched trades are executed. For example, if one trader enters an order to buy 100 shares of GOOG at $375, the order will not take place unless there is also an order to sell shares of GOOG at $375. Some platforms will restrict after hours trading even further by requiring all-or-nothing limit orders. These are so named because in the example above, an all-or-nothing trade will execute only if the exact reciprocal price and quantity is being bid or offered.
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Other Considerations
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The major attraction of after hours trading is the ability to react to late breaking news. The volume is low in after hours trading, though, which means volatility can be especially high. It's not unusual for stocks to move five percent or more in reaction to after the bell announcement. But not only is volatility higher after hours, but the bid and ask spreads are wider, too. This is another result of the lighter volume. The bid/ask spread is the space between the highest price being bid and the lowest price being offered to sell. Wide spreads can make for good deals, but they can also result in disappointing trades because protection that's available in the regular hour sessions, like trailing stops, are not available in the after market. All these factors, in addition to the trade restrictions, make it difficult for individual investors to realize any significant benefit from after hours trading.
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Resources
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