After Hours Trading: Will It Work for You

Have you ever turned on the news and heard reports of stocks making moves in after-hours trading after a big earnings announcement? Have you wondered what after-hours trading actually is and how it works, and what risks are involved? Here are some answers.

Normal market hours are 9:30 a.m. to 4 p.m. ET. After-hours trading occurs after the markets close. There is also a session prior to the market's open which is called the pre-market session. Together both sessions are referred to as extended-hours trading.

Extended-hours trading is made possible by computerized order matching systems called electronic markets. An electronic market is simply a service that matches up buy and sell orders. For example, if you place an order to buy 200 shares at $45, the computer looks to see if there is an order to sell at least 200 shares at $45. If there is, the trade is done, if not, then the order will not be filled. At Schwab, clients can place orders for after-market trading and execution between 4:05 and 8 p.m. ET. Commissions and settlement times are the same as for the regular session.

There are, though, several differences between regular session trading and after-hours trading. For example, in the after-hours session, not all order types are accepted. Traders can only use limit orders to buy, sell, or short. Stop and stop-limit orders, and orders with special conditions such as fill-or-kill, immediate-or-cancel, or all-or-none, can't be placed. Also, after-hours orders are good only for the particular session in which they are placed and don't carry over into any other session.

There are several potential benefits for after-hours trading:

Convenience: Some traders simply can't place trades during the normal session due to their schedules. The after-hours session allows them to check out the current quotes and potentially place a trade at a more convenient time.

Ability to react to news events: Many companies release earnings after the close of the regular session. After-hours traders can immediately place trades to manage their positions without having to wait until the next day's open and potentially miss meaningful price swings. The example below shows Intel Corp (INTC) making a big move after hours after releasing their earnings report.

While trading in the after-hours session can offer opportunities, there are unique risks to be considered.

Uncertain prices: In the regular session, the quotes you see are consolidated and represent the best available prices across all trading venues. In the after-hours market, on the other hand, you may see prices from only one venue, and these may not reflect the prices displayed in other electronic trading systems for the same security.

Lower liquidity: Because generally fewer shares trade after hours, there can be wide spreads between the bid (the highest price offered by all buyers) and the ask (the lowest price offered by all sellers). Some stocks may simply not trade after hours.

No index values: Index levels generally aren't calculated or disseminated for public use after hours, which could pose a challenge for individual investors hoping to trade certain index-tracking products in the after market. Professional may have access to proprietary systems that can quickly calculate index values based on individual stock prices, which generally gives them an edge over individual traders.

Trading in the extended sessions isn't for everybody. Those traders who understand both the potential risks and opportunities, however, could find it worthwhile.