After-Hours Trading Definition

What is after-hours trading?

After-hours trading begins at 4:00 p.m. US Eastern Time, after major US exchanges close. The after-hours trading session can run until 8 p.m., although volume typically drops much earlier in the session. After-hours trading is carried out by electronic communications networks (ECN).

What is after-hours trading?

Key points to remember

  • After-hours trading begins at 4:00 p.m. and ends around 8:00 p.m.
  • Stocks are not as liquid during after-hours trading.
  • The gap between bid and ask can be wider in after-hours trading.

Understanding after-hours trading

The spark

After-hours trading is something traders or investors can use if news breaks after the market closes.. In some cases, news, such as an earnings release, may prompt an investor to buy or sell a stock.

Volume

The volume as a headline may skyrocket on the initial news release, but most of the time thins out as the session progresses. The amount of volume usually slows down significantly at 6 p.m. There is substantial risk when trading illiquid stocks after business hours.

Price

Not only does volume sometimes have a premium in after-hours trading sessions, but so does price. It is not uncommon for spreads to be wide after hours. The spread is the difference between the bid price and the ask price. Due to the reduced number of stocks traded, the spread may be considerably wider than in a normal trading session.

Participation

If liquidity and prices weren’t reason enough to make after-hours trading risky, the lack of participants makes it even riskier. In some cases, certain investors or institutions may simply choose not to participate in after hours tradingwhatever the news or event.

This means it is entirely possible for a stock to fall sharply after business hours only to rally once the regular trading session resumes the following day at 9:30 a.m., if many large institutional investors take a different view of the stock. prices during the after-hours trading session.

Since volume is low and spreads are wide in after-hours trading, it is much easier to drive prices up or down, requiring less action to have a substantial impact. Since after-hours operations can have a significant impact on a share priceit’s not a bad idea to place a limit order on stocks you intend to buy or sell outside of regular trading times.

Real-world example of after-hours trading

Nvidia Corp. (NVDA) earnings results in February 2019 are a prime example of how after-hours trading works and the dangers that come with it. Nvidia released its quarterly results on February 14.The stock was greeted with a sharp rise in price, rising from $154.50 to nearly $169 within 10 minutes of the news.

As the chart shows, volume held steady for the first 10 minutes, then dropped rapidly after 4:30 p.m. In the first 5 minutes of trading, approximately 700,000 shares were traded and the stock jumped almost 6%. However, volume slowed significantly with only 350,000 shares trading between 4:25 and 4:30 a.m. As of 5 p.m., trading volume slowed to just 100,000 shares, while the stock was still trading around $165.

Image by Sabrina Jiang © Investopedia 2020


However, the next morning was a different story, when everyone in the market got a chance to weigh in on Nvidia’s results. From 9:30 a.m. to 9:35 a.m., nearly 2.3 million shares traded, more than three times the volume of the first few minutes of the after-hours the previous day, and the price rose from 164 $ to $161.

The stock traded lower throughout the day, closing at $157.20. It was just $3 higher than the previous day’s close, having risen nearly $15 in the after-hours session. Almost all of the after-hours gains had evaporated.

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