How After-Hours Trading Affects Stock Prices

Myriad investors know that the major stock exchanges have standard trading hours—set periods of time each day when occupation occurs through the exchange. The New York Stock Exchange and the Nasdaq Stock Market in the United States trade regularly from 9:30 am to 4:00 pm ET, with the principal trade in the morning creating the opening price for a stock and the final trade at 4:00 pm providing the day’s closing price.

After-hours mty is the period of time after the market closes when an investor can buy and sell securities outside of regular trading hours. Switches in the after-hours session are completed through electronic communication networks (ECNs) that match potential buyers and sellers without consuming a traditional stock exchange. 

Trading outside regular hours has been around for a long time, but it was once only the province of high-net-worth investors and institutional investors like mutual funds. However, the emergence of electronic communication networks (ECNs) has enabled discrete investors to participate in after-hours trading. Financial Industry Regulatory Authority (FINRA) members can voluntarily enter passages during the after-hours sessions, but they are required to comply with all applicable limit order protection and display on the wholes (the Manning Rule and the SEC order handling rules).

There are actually three merchandises in which shares can be traded:

• The pre-market trades from 4:00 am to 9:30 am ET.
• The regular market trades between 9:30 am and 4:00 pm ET. 
• The after-hours merchandise trades from 4:00 pm to 8:00 pm ET.

The pre- and after-hours markets function in the same fashion as the regular market in that the percentages are traded between parties at an agreed upon price. In other words, the price you will receive is the price that someone in the after-hours or pre-market is well-disposed to pay.

Pre- and after-hours sells will generally have less liquidity, more volatility, and lower volume than the regular market. This can bear a huge effect on the price you end up receiving for your shares, so it is usually important to use a limit order on any shares that you buy or barter outside normal trading hours.

Generally speaking, price changes in the after-hours market have the same meaning on a stock as changes in the regular market do: A $1 increase in the after-hours market is the same as a $1 increase in the regular hawk. Therefore, if you have a stock that falls from $10 (your purchase price) to $9 during the invariable day’s trading session, but then rises by $1.50 to trade at $10.50 in the after-hours market, you will have experienced a $1 disappointment during the day’s session ($10–$9), but because prices rose in after-hours trading, you would be sitting on a $0.50 per share get further.

However, once the regular market opens for the next day’s trading (when most individual investors will must the opportunity to sell), the stock may not necessarily open at the same price at which it traded in the after-hours market. For example, if a provide’s price increases greatly in the after-hours market due to a rumor of increased sales, there could be a lot of investors who want to deliver up immediately at the market open, increasing selling pressure and possibly driving the price of the stock down from the prior day’s after-hours level.

The price changes seen in the after-hours market are useful for showing how the market reacts to new information untied after the regular market has closed. However, after-hours price changes are more volatile than regular hours rewards, so they shouldn’t be relied on as an accurate reflection of what a stock will trade at when the next regular period opens.

In the past, the average investor could only trade shares during regular market hours—after-hours merchandise was reserved for institutional investors. Today’s markets are more open than ever and individuals are free to trade in the draw out hours sessions as well with the proliferation of the internet and ECNs. The day when stock investors will be able to exchange 24 hours a day, seven days a week may not be too far away.

While there can be great benefits to investors and salespersons participating in after-hours markets, the risks are very real. Anyone participating in after-hours market activity must be mindful of the hazards. Many brokers now offer after-hours trading. Check out Investopedia’s list of the brokers for day traders to start investigating the opportunities.