How Does After-Hours Trading Work?

By Markets Fool.com

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Normal stock market trading hours for the New York Stock Exchange and Nasdaq are from 9:30 a.m. to 4:00 p.m. ET. However, depending on your brokerage, you may still be able to buy and sell stocks after the market closes, in a process known as after-hours trading.

It depends on your brokerage

Trading hours before the market is open is known as the pre-market session, while trading periods after the market's close are known as the after-hours trading session. The ability to trade in the after hours, as well as the rules and fees involved, if any, vary depending on your brokerage. Most major brokers allow after-hours trading between the hours of 4:00 and 8:00 p.m., but this isn't a universal standard. For example, TD Ameritrade opens its after-hours session at 4:15 p.m., 15 minutes after the market closes. Others have narrower windows, such as Wells Fargo, which limits after-hours trading to a period from 4:05 to 5:00 p.m.

Also, some (but not most) brokerages charge additional fees for extended-hours trading. Notably, E*Trade charges a $0.005 fee per share for extended-hour trades. This fee translates to an additional $5 on a 1,000-share trade, so it's worth looking into your brokerage's policies.

There are also different rules about what types of orders can be placed, as well as different procedures regarding how orders are routed. For example, many brokerages only accept unconditional limit orders to buy, sell, and short-sell securities. Stop orders and more complex orders (such as an all-or-none order), as well as orders to buy mutual funds, bonds, or options, are not accepted in the after-hours session.

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In a nutshell, be sure to get familiar with your brokerage's extended-hour policies before getting started.

Things to keep in mind

Before you start trading in the after-hours session, there are a few things you need to keep in mind. I mentioned that some brokerages charge additional fees for after-hours trading, so be sure to factor this cost into your trading strategy.

Additional risks include, but are not necessarily limited to:

  • Liquidity: There are fewer participants in extended-hours sessions, which can make it more difficult to buy and sell stocks quickly. In addition, lower liquidity can lead to wider bid-ask spreads.
  • Volatility: Stocks can be more volatile in the after-hours, which is especially true when a major news item is released. And a price jump or drop in the after-hours doesn't necessarily mean it will carry over to the following morning.

If you're interested, TD Ameritrade publishes an excellent guide to the risks, and to its rules of extended-hours trading.

The bottom line is that after-hours trading is possible and can help you react to earnings reports and other news that takes place outside of normal market hours. However, each brokerage has its own policies regarding after-hours trading, and the rules can be more restrictive, so be sure to do your homework before getting started.

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