What Is After-Hours Trading?
After-hours trading starts at 4 p.m. U.S. Eastern Time after the major U.S. stock exchanges close. The after-hours trading session can run as late as 8 p.m., though volume typically thins out much earlier in the session. Trading in the after-hours is conducted through electronic communication networks (ECNs).
Understanding After-Hours Trading
After-hours trading is something traders or investors can use if news breaks after the close of the stock exchange. In some cases, the news, such as an earnings release, may prompt an investor to either buy or sell a stock.
The volume for a stock may spike on the initial release of the news but most of the time thins out as the session progresses. The amount of volume generally slows significantly by 6 p.m. There is a substantial risk when trading in illiquid stocks after-hours.
Not only does volume sometimes come at a premium in the after-hours trading sessions but so does price. It is not unusual for the spreads to be wide in the after-hours. The spread is the difference between the bid and the ask prices. Due to fewer shares trading, the spread may be significantly wider than during the normal trading session.
If liquidity and prices weren’t enough of a reason to make after-hours trading risky, the lack of participants makes it even riskier. In some cases, certain investors or institutions may choose simply not to participate in after-hours trading, regardless of the news or the event.
This means that it is quite possible for a stock to fall sharply in the after-hours only to rise once the regular trading session resumes the next day at 9:30 a.m., should many big institutional investors have a different view of the price action during the after-hours trading session.
Because volume is thin and spreads are wide in after-hours trading it is much easier to push prices higher or lower, requiring fewer shares to make a substantial impact. Since after-hours trading can have a significant impact on a stock’s price, it’s not a bad idea to put a limit order on any shares you intend to buy or sell outside of regular trading periods.
Real-World Example of After-Hours Trading
Nvidia Corp. (NVDA) earnings results in February 2019 are an excellent example of how after-hours trading works and the dangers that come with it. Nvidia reported quarterly results on February 14.1 The stock was greeted by a big jump in price, rising to nearly $169 from $154.50 in the 10 minutes following the news.
As the chart shows, volume was steady in the first 10 minutes and then dropped quickly after 4:30 p.m. During the first 5 minutes of trading, around 700,000 shares traded and the stock jumped nearly 6%. However, volume slowed materially with just 350,000 shares trading between 4:25 and 4:30. By 5 p.m., the amount of volume trading slowed to only 100,000 shares, while the stock was still trading around $165.
However, the next morning was a different story, which was when all the market participants had a chance to weigh in on Nvidia’s results. From 9:30 a.m. 9:35 a.m., nearly 2.3 million shares traded, more than three times greater than the volume in the initial minutes of the previous day’s after-hours, and the price dropped from $164 to $161.
The stock proceeded to trade lower throughout the rest of the day, closing at $157.20. That was just $3 higher than the previous day’s close, after being up nearly $15 in the after-hours session. Nearly all of the after-hours gains had evaporated.Learn the Basics of Trading and InvestingLooking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and get started today.