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What Is After-Hours Trading?

After-hours trading occurs between 4 p.m. and 8 p.m. Eastern Time (EST). During this period, potential buyers and sellers are matched through electronic communication networks (ECNs). While after-hours trading gives investors a chance to capitalize on after-market news, these trades carry greater risk. 

🤔 Understanding after-hours trading

The major U.S. stock exchanges such as the Nasdaq and NYSE operate standard trading hours from 9:30 a.m. to 4 p.m. ET, Monday through Friday. Historically, only high-net-worth investors and institutional investors could trade after the markets officially closed. But with the advent of ECNs, everyday investors can trade after hours, too. 

Trades during after-market hours work similarly to trades during regular hours. An investor can place their bid through their brokerage, which relays the message through the ECN. Then, if a buyer is offering that security for sale at a similar ask price, the system matches the trade. 

However, after-hours trading carries some differences. 

To start, fewer investors participate in after-hours trades than during the day. As a result, the after-hours market is known for its lower trading volume and liquidity, which can contribute to higher volatility. 

Because these factors stand to substantially impact the price investors receive for their shares, investors typically use limit orders to minimize risk. Limit orders reduce the risk of a trade filling at an undesirable price for the buyer. 

However, investors may not see their orders executed if a buyer won’t part with shares at the limit order price. Not only that, but after-hours orders are only good for that trading session, so your order will expire if it’s not filled by 8 p.m.

What this means for you

The after-hours trading window allows you to capitalize on business information that comes to light after the market close. For instance, many companies release their quarterly earnings report later in the day, which can move their shares. Not to mention, the rest of the economy doesn’t pause until the market reopens. 

The ability to respond to economic and business developments outside regular trading hours is invaluable for some investors. And even if you don’t participate, after-hours volatility can provide valuable insights into which stocks may trade hot the next day. 

However, because prices tend to swing harder after hours, it’s unwise to consider the price points an accurate measure of where the market will open. Additionally, bear in mind that price volatility is partly due to lower liquidity and wider bid-ask spreads. (The spread is the difference between the bidding and asking price of a security.) 

Here at Q.ai, we advocate taking the long view of investing. By investing in regular increments, you can take advantage of time and dollar-cost averaging to maximize your portfolio returns. In other words, after-hours trading may be best left as a time to gain insights from the market – not participate. 

But if you’re interested in trading after hours, it’s essential to understand your broker’s rules. For instance, most only permit limit orders, and some charge higher fees for after-hours orders. You should also be prepared to face the higher risks and volatility that come with after-hours trades. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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