After Hours Stock Trading

After hours stock trading refers to trading securities after the major exchanges have already closed. Typically this lasts from 4 pm to 8 pm eastern standard time.

Until 1999 after hours stock trading was restricted to the common individual. Only large institutions could trade in the markets during that time. This posed a problem. Why could the large institutions have access to trading after the market closes and the individual investor can’t?

Most people believe that if you can get into a stock when news is announced you stand a better chance to profit from it, and if that news is announced after hours that is when you need to get in. Nowadays after hours trading is opened to anyone who wants to trade it.

How is it done?

Trading is done completely electronically afterword with no specialists to match buy and sell orders. There are 3 exchanges that trade after hours.

1. US exchange after hours

2. Foreign exchange after hours

3. ECN (Electronic Communication Network)

Prices fluctuate after hours just like they do during trading hours. Most brokers charge the same amount for after hours trading as they do for during normal hours trading. But it is harder to play short term moves after hours then it is during hours for a few different reasons.

Stock After Hours Trading Problems

1. The problem that causes all other problems in after hours trading is liquidity. There is simply less trading going on when the markets are closed.

2. This lack of liquidity leads to larger spreads. Stocks always have spreads on them. There is always a different price that you can buy your stock at and the price you can sell it at. This difference is how the exchanges make their money. During regular trading hours this is difference is relatively small. After hours, however it can be sometimes have huge spreads.

3. Larger price fluctuations. This could either be a good thing or a bad thing, but it definitely makes after hours trading riskier.

4. You might not get filled. During regular hours your orders will get filled. After hours you only get filled if they can match your buy order with a sell order, vice versa.

5. The only problem that does not come from lack of liquidity is the limit order. When trading after hours you MUST use a limit order. This could drastically hurt your gains by keeping you from getting into a stock before a big move and making it harder to limit your losses by exiting a stock that turns against you.

While, I personally do not engage in after hours stock trading because it is harder to get in and out of a position, it can be very profitable if done right.