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How After-Hours Trading Works and How it Impacts You

2022/07/25
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How After-Hours Trading Works and How it Impacts You

When people begin to invest in the stock market, they quickly learn that standard stock market hours dictate when the different markets around the world are officially open. For example, the New York Stock Exchange and the NASDAQ are open between 9:30 am and 4:00 pm Eastern Time. During this window, people can quickly buy and sell stock according to the demand.

However, sometimes investors wish they could trade after the official regular trading session. In this situation, traders have the option of using after-hours trading options. We will explore what you need to know about extended-hours trading and what to do if you want to get involved with this type of trading activity.


What is after-hours trading?

When making trades outside of the traditional market hours, the process works similarly to the standard market trades. The buyer and the seller agree to the sale of the particular stock. However, since fewer people are trading outside of the standard market hours, there is generally less liquidity in the stocks and a wider bid-ask spread, impacting the stock's selling price. Many traders find that trading outside of typical hours can create more volatile prices that rise and fall more sharply, thus requiring limit orders. We will explore limit orders and their importance in this situation in the following section.


How does after-hours trading work? 

Trading outside of the regular trading hours used to be restricted to high net-worth investors and institutions. However, modern technology has now opened pre-market trading and after-hours trading to everyone. Now, just about any trader can trade while the stock market is technically closed through the electronic communications network or ECN. These electronic systems will match orders with the stocks available and allow investors to make their trades.

As previously mentioned, those interested in making the trades should plan on using limit orders because of the higher volatility of the market. The limit order is designed to only fill the order at a price specified on order instead of the price at the moment. In other words, the trader will specify the amount of stock they want to buy or sell and the price at which they want to fill this order. The order will then only be filled when the stock matches this target price. This order helps to protect the trader in case a price rises or falls suddenly. If this sudden rise or fall happens when a person is in the middle of a transaction, they might find themselves with a purchase at a price they had not intended, thus potentially resulting in severe losses.


What time is after-hours trading? 

Outside of the regular trading hours of 9:30 am to 4:00 pm Eastern Time, investors have the option of making trades in the pre-market hours and the after-hours. The pre-market trades can be made between 4:00 am and 9:30 am Eastern Time, while the after-hours trading session runs from 4:00 pm to 8:00 pm Eastern Time.


How does after-hours trading impact the market? 

Investors should have a firm understanding of how after-hours trading impacts the standard stock market. The trades completed in the pre-market hours and the after-hours market do not automatically dictate the opening price of a given stock, though they may influence it. The opening price is determined by the first purchase of the day on that given day. Therefore, just because a stock sees a dramatic rise or fall during the after-hours trading time, it will not necessarily open as high or low as during non-standard trading hours. However, the first trade of the day will often be influenced by what traders did before the market opened.

Investors will need to consider the impact of these trading hours on stock prices on a case-by-case basis.

On the other hand, many traders find that the trades made when the stock market has closed provide valuable insight into a specific stock's future performance. For example, some companies might not release important information, such as a jobs report or their quarterly earnings report, until the market has closed. These reports, however, can provide a valuable benchmark for understanding the current company performance and how the stock responds to the news, and thus can help traders know better how to invest in this particular company. Suppose an earnings report release causes stocks to rise or fall dramatically after the news goes public. In that case, traders might see how the market will likely react to the report during normal market hours and thus can adjust their trading strategy accordingly.


What are the benefits of after-hours trading?

There are unique benefits to after-hours trading that makes it an attractive option for many traders. One of the most important advantages is convenience. Not everyone is able to take time for trading during the normal market hours, whether from working during those times or having other obligations. In addition, since many company announcements or news events are not limited to market hours, trading after hours or during pre-market times allow individual traders to react quickly and strike with the iron is hot.


What are the disadvantages of after-hours trading?

Some of the considerable risks of after-hours trading have already been mentioned, namely low liquidity and high volatility. But another significant concern that individual traders should be aware of is that many institutions and professional traders are active during pre-market and after-hours sessions. These professionals and large entities have access to proprietary systems that provide advanced data and index values to inform their trades — information not available to individual traders.


How do I get started with after-hours trading? 

Those who understand how the market works, and the opportunities available in after-hours trading, may want to get involved with this trading strategy. If you want to get started with after-hours trading, here is what you need to know to set yourself up in the best position possible.

Step 1. Find a brokerage platform that allows you to make after hours

Your first step involves finding a brokerage that will help you trade outside of the standard stock market hours. For example, the moomoo app offers access to both pre-market and after-hours trading. This makes the entire process simple for customers to trade in their non-market hours as easily as they do for regular market hours. Since these customers have just one platform to use for both their standard trading options and their after-hours trades, they can also easily monitor their progress across different stocks as they continue to study and improve their performance.

Step 2. Keep a close eye on your preferred stocks 

Stock sold during after-hours and pre-market hours often becomes more volatile, and fewer people buy or sell the stock. Trading during these non-standard hours requires a considerable understanding of the market and how stocks react to different types of market news during this time. Investors new to trading outside of the traditional market hours might find it helpful to engage in some paper trading to get started as they learn to watch the after-hours behavior and the market response to different announcements and reports.

Step 3. Remain up to date on the latest news and announcements 

Many traders like the potential of after-hours trading because they can quickly react and respond to the latest news and events impacting the industry, particularly those outside the typical market hours. Since this will provide a key opportunity for traders to secure highly coveted stock, you want to make sure that you regularly keep yourself up to date on the latest news so that you know when these opportunities arise and you can take advantage of them. Using in-depth market data, such as the Level 2 market data offered in the app, can help you make more informed decisions for your trades.

Step 4. Keep a close eye on your stocks as you move forward

Once you take those initial steps towards using your after-hours trading capabilities, make sure you do not forget to regularly monitor your stocks both through the regular market hours and the pre-market hours and after-hours trading times. Taking time to regularly check your portfolio and the market will help you better understand the behavior of the stock, your performance, and the optimal times to buy and sell so that you can improve your investment strategy.


Get started with after-hours trading 

The moomoo app makes it easy for traders to get started investing outside standard trading hours. By opening an account with moomoo, you have access to our industry-leading brokerage platform along with in-depth market data that makes trading straightforward. With access to a variety of products across multiple markets, as well as pre-market hours and after-hours trading, our investors can engage with their stocks at any time and can actively trade for over 22 hours on trading days. Start watching the after-hours behavior of your favorite stocks and consider if this trading technique will work well for you.

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