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.
What is after hours trading?
Normal market hours are 9:30 a.m. to 4 p.m. ET. After-hours trading occurs after the markets close. Schwab clients can trade after hours from 4:05 p.m. to 8:00 p.m. ET on Schwab.com or Schwab Mobile, or round the clock on thinkorswim® by choosing an EXTO order type (see table for details).
There is also a session prior to the market’s open which is called the pre-market session; Schwab clients can trade from 7:00 a.m. ET to 9:25 am ET on Schwab.com or Schwab Mobile, or round the clock on thinkorswim by choosing an EXTO order type. Together, both the pre-market and after-hours sessions are referred to as extended-hours trading.
How does it work?
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.
While commissions and settlement times are the same as for the regular session, there are 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. Market, 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.
After-hours orders are good only for the particular session in which they are placed and don’t carry over into any other session—unless you’re using thinkorswim trading platforms and define your timeframe as “GTC_EXT,” which means Good Til Canceled, including the Extended Hours. Be aware that using GTC_EXT might give you the opportunity to exit or enter their trade at the price you want, but for thinly traded securities, this might result in multiple executions to fill the order. (Likely not a concern if you’re trading listed securities, which don’t carry fees or commissions, but international and over-the-counter stocks may carry fees or commissions on a per-execution basis.)
What are some of the advantages of after-hours trading?
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.
What are the risks?
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 traders 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.
Bottom Line
Trading in the extended sessions isn’t for everybody. Those traders who understand both the potential risks and opportunities, however, could find it worthwhile.
Regular market vs. extended hours sessions
| Regular trading session | Extended-hours sessions |
|---|---|
| Orders can be placed at any time and will only be executed from 9:30 a.m. to 4:00 p.m. ET | Orders in extended hours can be placed outside of regular market hours (9:30 a.m. to 4:00 p.m. ET) and are available for the following times: For orders placed on thinkorswim platforms: 7:00 a.m. to 8:00 p.m. ET with five-minute closures before and after regular market hours. Overnight trading is available 24 hours a day, every market day, by choosing an EXTO order type. EXTO orders expire at 8:00 p.m. ET each day. For example, an EXTO order placed at 2:00 a.m. ET Monday morning would be active immediately and remain active from then until 8:00 p.m. ET Monday night. A trade placed at 9:00 p.m. ET Monday night would be active immediately and remain active until 8:00 p.m. ET Tuesday night. For orders placed on Schwab.com or Schwab Mobile: 7:00 a.m to 8:00 p.m ET with five-minute closures before and after regular market hours. |
| Trading occurs on exchanges like the New York Stock Exchange (NYSE) and Nasdaq and through a variety of venues, including market makers and other market centers. | Similar to regular market sessions, trading occurs on exchanges like the New York Stock Exchange and Nasdaq and through a variety of venues, including market makers and other market centers. |
| Many order types and restrictions are accepted, including: market, limit, stop-limit, all-or-none, etc. | Only limit orders are accepted |
| All order sizes are accepted | For pre-market and after-market trading sessions on Schwab.com, there is no maximum quantity on a single order. For an overnight trading session, 50,000 shares, or a notional value of $10 million dollars, is the maximum quantity on a single order. |
| Many security types are available, including: stocks, options, bonds, mutual funds, etc. | Most listed and NASDAQ securities are available in the extended hours session |
| Different timing choices are available, including: Day, GTC, IOC and FOK | Pre-market, after-hours, and overnight session order types are only good for the particular session in which they are placed. Seamless orders that participate in pre-market, regular market, and after-hours trading are available to be placed GTC. Note that GTC EXTO must be chosen to place overnight trading on thinkorswim trading platforms. |
| In general, higher trading activity means more liquidity and a greater likelihood of order execution | Lower trading activity may result in lower likelihood of order execution, wider spreads and greater price fluctuation |
| The quotes you receive are consolidated and represent the best available prices across all trading venues; market makers and specialists work to ensure customers get the best available buy or sell prices | Quotes and fills are not consolidated and represent the current prices available through the market. As a participant in the extended hours trading network, the market may also offer access to prices available in other participating markets but not necessarily all venues open for extended hours trading. Best execution is not guaranteed. |
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